You need a decent credit score if you want affordable access to credit. Whether it’s a new car loan or a mortgage, your credit score will make all the difference.
One of the most evasive but impactful things that can cause your credit score to fall is a charge-off. If you failed to make minimum payments for more than half a year, you likely have one on your record. Sometimes, people even find charge-offs on their credit reports without having any delinquent debts. Credit reporting bureaus make mistakes, as do the institutions that report to them.
It’s important to understand how charge-offs work to avoid them. But amid the Covid-19 pandemic, charge-offs are becoming more common as millions of people are unemployed and some are unable to pay back debts. If it’s already too late and you’ve seen one on your credit reports, you may have a few options for removing a charge-off from your record.
What Are Charge-Offs?
A charge-off is an event that is triggered when one of your credit accounts falls delinquent.
Delinquency, when discussing credit, is when you fail to pay back your debts.
A charge-off happens when a creditor finds a delinquent debt that they deem unlikely to be paid off. If you are substantially delinquent for a long time, your creditor may trigger a charge-off. This normally happens after six months of non-payment.
A charge-off means that you are no longer required to pay off your debt. Creditors normally sell charge-off debt to third-party collections agencies that will attempt to collect on your delinquent account. Of course, your charge-off will also make it onto your credit reports, and it will have a serious effect.
Charge-offs will cause your score to drop significantly. Lenders who see the charge-off on your report will also be very wary about lending you money. You will have difficulty getting approved for credit with decent interest rates for a long time.
What You Can Do
There are a few things you can do if you’ve been through a charge-off.
1. Dispute Your Charge-Off
Sometimes, charge-offs are erroneously added to consumer credit reports. You are legally entitled to challenge credit bureaus on any item that you believe to be erroneous. Credit bureaus are legally obliged to investigate disputes.
If a credit bureau investigates your dispute and finds out that there was an error, they will remove it immediately.
2. Negotiate With Your Creditor
Negotiations often fail when the negotiator is the person with a charged-off account. But you may be able to persuade your creditor to remove the charge-off from your credit file. This most often happens when you agree to a “pay to delete” arrangement. If you and the creditor come to an agreement, you can pay a fee to have them remove the charge-off from your reports.
Pay to delete arrangements are completely legal under the Fair Credit Reporting Act, but there are a few catches. The biggest catch is that creditors are not obliged to agree to any proposition.
If the creditor does agree, you will most likely be required to pay off your account in full. If the delinquency has continued for an extraordinarily long time, creditors will often agree to a reduced payment. But either way, you can be sure that they will want you to pay off some of your debt to them.
3. Professional Negotiators
You can outsource your negotiations to a credit repair company. You have to be careful with that, though. The credit repair industry is rife with scams. Also, the legitimate professionals in the industry can’t do much more than what you could do on your own. But if you don’t feel that you can handle the stresses of dealing with creditors, you could consider this option.
Lastly, you have the nuclear option.
Chapter 7 Bankruptcy will discharge most unsecured debts you have. Many charged-off loans can also be removed when you declare bankruptcy.