A charge-off is a debt a creditor deems unlikely to be repaid after a borrower misses several payments.
When a charge-off occurs, the creditor writes off the debt as a loss. That doesn’t mean you don’t have to pay the money back—even after a charge-off, you’re still responsible for paying off a debt. A charge-off can seriously affect your credit score.
Read on to learn more about charge-offs.
How does a charge-off impact your credit?
A charge-off can cause your credit score to drop significantly.
Before an account is charged off, you must first miss several payments. Missed payments can greatly impact your credit score and may stay on your credit report for up to 7 years.
Once a charge-off occurs, the creditor may report it to the 3 major credit bureaus. Like late payments, a charge-off can remain on your credit report for up to 7 years, making it harder to qualify for new credit.
Are you still responsible for paying the debt?
Yes, in most cases you’re still obligated to pay off a charged-off debt, even if the creditor no longer actively pursues payment. If you pay the debt off, it may show up on your credit report as a paid charge-off.
How to avoid a charge-off
If you’re at risk of missing credit card payments, there are a few strategies to try.
Budget carefully:
Establish a budget to track your income, expenses and payment due dates. This can help you avoid missing payments.
Set up automatic payments:
Consider setting up automatic payments for at least the minimum amount due each month. Doing this can help prevent accidental missed payments.
Communicate with your creditors:
If you’re struggling to pay your bills, contact your creditors immediately. You may be able to work out a payment plan or other arrangement.
Rebuilding creditworthiness after a charge-off
Beyond paying off the charged-off debt, if a charge-off has already occurred, you may be able to help rebuild your credit through:
Secured credit cards:
Secured cards are an option for people rebuilding their credit. Secured cards require a security deposit, which the lender can use to cover missed payments. Making consistent on-time payments over time can show lenders you’re a responsible borrower.
Credit-builder Loans:
Consider credit-builder loans, which are small loans designed to help you build credit with regular payments. Instead of giving you the loan amount, the lender holds it as collateral. They keep the money in a savings or other interest-bearing account until you pay everything back.
Monitor your credit report:
Regularly review your credit report for accuracy and track your progress as you work toward rebuilding your credit .
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
