What Is a Charge-Off?

Quick Breakdown:

• A charge-off is not debt forgiveness. You still owe the full amount.

• It happens after 120-180 days of missed payments on most revolving accounts.

• A charge-off stays on your credit report for seven years from the date of first delinquency.

• Paying a charge-off does not remove it from your report, but it updates the status to paid.

A charge-off is a creditor's declaration that a debt is unlikely to be repaid. It typically happens after a consumer has missed four or more months of payments. Despite the name, a charge-off does not erase what you owe; the debt remains valid and the creditor (or a collection agency) can still attempt to collect it. A charge-off is also reported to the credit bureaus, where it can remain as a negative entry for up to seven years.

What Leads to a Charge-Off?

As long as you make the minimum payments due on your account, you won’t have to worry about a charge-off. If you fall behind on your obligations, however, you run the risk of having the bank charge off your account — especially if you go without paying for an extended period.

Here’s an example of a timeline that leads to a charge-off:

30 Days Delinquent

When you fall 30 days behind on payments, your creditor or lender will usually send you a late notice, which may include late fees. Creditors may also increase your interest on future purchases. 

If your creditor increases the interest on future purchases, that doesn’t mean the interest will remain that way indefinitely. You may be eligible for an interest reduction in the future with good payment history.

Under the Credit Card Accountability Responsibility and Disclosure Act of 2009, creditors are required to review your credit card account once every six months after it has raised your rate to determine if your account is eligible for an interest rate decrease. However, your creditors only have to review your account, not lower the rate, which means you could be stuck paying higher interest until you pay off your balance.

60 Days Delinquent

If you miss another month’s payment, making your payment 60 days late, your creditor will likely send another late notice. Additional late fees will also apply. 

Your creditor may also increase the interest rate on your current balance. Not all credit card issuers implement a penalty APR. You can find out by looking at your credit card’s terms and conditions.

90 Days Delinquent 

Each month you don’t make payments to bring your account current, you can expect to continue to receive late notices and incur additional late fees. Loans that reach this stage of delinquency are classified as substandard by creditors under FDIC guidelines, meaning the creditor recognizes it may incur a loss if the loan is not brought current.

120 Days Delinquent

Some loans that reach 120 days of delinquency will be charged off. According to the FDIC, closed-end or installment loans, such as auto loans, that are 120 days past due should be declared a loss and charged off. Open-end loans, such as revolving credit card accounts, are not subject to this 120-day rule.

180 Days Delinquent

Credit cards that are 180 days delinquent are subject to charge-off. According to the FDIC, after 180 days — or six months — of a consumer being delinquent on an open-end or revolving credit account, the creditor should declare the account a loss and charge it off.

At this point, the account may be sold to a collection agency. If that happens, a separate collection entry will generally appear on your credit report in addition to the charge-off, creating two negative marks for the same unpaid debt.

How Does a Charge-Off Affect Your Credit? 

Because accounts are typically charged off after 180 days, you will have already missed multiple payments before the charge-off. As you miss payments, your creditor will likely report the information to one or more credit bureaus, which will be noted in your credit files. Because payment history makes up a significant portion of your credit score, missed payments may have a negative effect.

If you continue not to make payments and your account is listed as a charge-off, your credit scores will likely suffer additional dings. If your account is sent to a collection agency after a charge-off, it will be noted in your credit history, which is a derogatory mark on your credit.

Even though a charge-off can remain on your credit report for seven years from the date it was first reported, the effects of the charge-off on your credit score can begin to lessen over time if you practice good credit habits, such as making on-time payments and paying off credit balances.

The impact of a charge-off on your score depends on which scoring model is being used. Under VantageScore 3.0, which ScoreSense uses to calculate your scores, a paid collection account may be weighted less heavily than an unpaid one. Under FICO 8, both paid and unpaid collections carry similar weight. Under FICO 9, paid collections are ignored entirely, though mortgage lenders rarely use FICO 9.

If the charge-off is followed by a collection account, the compounding effect can be significant. Each entry is scored independently as a derogatory mark, even when both entries refer to the same original debt.

The good news: the impact of a charge-off on your score diminishes over time. A charge-off from five years ago affects your score far less than one from last year, provided you have maintained positive credit behavior in the interim.

Should You Pay Off a Charge-Off?

Even after an account is charged off, you’re still responsible for the debt until it’s paid off, settled, discharged as a result of a bankruptcy filing, or removed as a result of a validated dispute.

If you choose to pay the charged-off debt, it will be noted as such on your credit report. Anyone who pulls your credit report in the future will see the notation and know that you made the effort to repay your debt, which can reflect favorably on you.

If you choose not to pay off your debt, however, you may be denied credit or loans or asked to pay off your outstanding debts before you can be approved for a loan, such as a mortgage.

Paid-Off or Settled Charged-Off Accounts and Your Credit

Charged-off accounts that you choose to pay off, or settle for less than the amount owed, can affect your credit score. Here’s how each situation is noted on your credit report.

1. Pay off the charge-off via the original creditor

If the original creditor is still handling your debt after it is charged off, you can arrange to pay it back. Once the debt is paid off, the creditor will update the balance to zero and report the account status as “paid charge-off.”

Lenders generally view a paid charge-off more favorably than an unpaid debt.

2. Negotiate a settlement

Sometimes, a collection agency or the original creditor will offer to settle the debt for an amount less than you owe. Many unsecured creditors will settle for 30 to 50 percent of the total debt owed. For example, if the balance you owe is $5,000 and the collection agency settles for 40 percent of the total debt, you’ll only have to pay $2,000.

Settling a debt may impact your credit score, but once you settle, there won’t be any more collection attempts. The debt will appear on your credit report as a “settled charge-off.”  Be aware, however, that the IRS requires lenders to notify it whenever a debt of $600 or more is forgiven. If this happens, you could end up owing more taxes. According to the IRS, forgiven debt is considered taxable income.

3. Pay off the collection

If the original creditor has sold the charge-off to a collection agency, you can pay off the debt via the collection agency. You may want to write to the collection agency and ask it to verify that it owns the account before paying, so your payment will be credited properly.

After paying off a collection debt, your credit report will state, “paid collection,” which may appear more favorable to lenders than an unpaid debt.

4. Follow Up

After you’ve settled or paid the debt, ask the original creditor or collection agency to send you a confirmation letter. Follow up by checking your credit reports to ensure that the accounts are shown as paid or settled. If your credit report is not updated, you can file a dispute with the credit reporting agencies and use the letter as evidence to support your claim.

How Long Does a Charge-Off Stay on Your Credit Report?

A charge-off remains on your credit report for seven years from the date of first delinquency specifically the date you first missed a payment that eventually led to the charge-off. This is governed by the Fair Credit Reporting Act (FCRA).

The removal clock does not reset when the account is sold to a collection agency, when you make a payment, or when the account is settled. The seven-year period runs from that original delinquency date regardless.

One exception: if a creditor or collector illegally re-ages the account by reporting a newer, incorrect date of first delinquency, the entry could stay on your report longer than it should. If you believe an entry has been re-aged, you can file a dispute with the bureau reporting the error.

What Happens After a Charge-Off?

After a creditor charges off a debt, one of two things typically happens:

1. The original creditor keeps the account in-house and continues collection attempts through its own recovery department.

2. The creditor sells the debt to a third-party collection agency, which takes over collection and may report its own entry to the credit bureaus.

If the debt is sold, you may see two separate entries on your credit report for the same unpaid balance: one from the original creditor showing a charge-off status, and one from the collection agency showing an outstanding balance. Both are valid entries, and both can count against your credit score independently.

Frequently Asked Questions

Most Recent Rules Affecting Charge-Offs

Credit reporting rules affecting charge-offs and collections have continued to evolve. As of 2023, the Consumer Financial Protection Bureau (CFPB) has taken an active role in scrutinizing medical debt reporting. Medical collections under $500 no longer appear on credit reports with the three major bureaus. Collections resulting from debt with no contract or payment agreement such as traffic tickets, must be removed once paid in full.

The seven-year removal timeline for charge-offs is governed by the Fair Credit Reporting Act and has not changed. If you believe a charge-off entry is inaccurate or has been re-aged, you can file a dispute directly with the bureau reporting it.

In addition, delinquent medical bill payments may not show up on your credit history until they are six months past-due. This grace period allows time for any insurance or billing issues to be sorted out.

After six months, if the payment is not resolved, medical collections could become part of your credit report. However, some credit scoring models do not weigh medical collections as heavily as other types of collections and may not factor them in at all if you choose to pay off the collection.

Advantages of Monitoring Your Credit

Charge-offs and collections do not always appear on all three bureau reports simultaneously. A charge-off might show on your TransUnion report but not yet on Equifax. Monitoring all three gives you the complete picture.

ScoreSense gives you access to your credit scores and reports from all three bureaus TransUnion, Equifax, and Experian, so you can see what lenders may see. If a charge-off or collection is reported, you will receive an alert. You can also use ScoreTracker to watch how your score changes over time.