How to Repair Credit After a Charge-Off

What Is a Charge-Off?

A charge-off happens when you stop paying on something, typically after 180 days of no payments, but the timing can vary. It’s a serious delinquent account and can cause lots of damage to your credit score.

While the name “charge-off” may give the impression that you’re off the hook, this isn’t the case.

Once a debt is considered a charge-off, it’s called “bad debt,” and the account is closed according to your creditor. A creditor can only report an account as an asset for so long, and the more time that has passed, the less likely it is that the debt will be paid off. After a certain amount of time, the creditor notes the past-due account as a charge-off and takes it off their books.

After this, the account is likely to be sold to a debt collection agency, which then starts its own collection efforts. You can still be called or contacted about the debt because you still owe that amount – your original creditor has simply passed the buck to someone else.

How Charge-Offs Affect Your Credit Score

Having a charge-off on your credit reports isn’t the best situation to be in, since it lowers your credit score. This can make getting new credit difficult. Having accounts in collections can also harm your credit. Payment history is the biggest part of your credit score, making up 35% of it, so the missed or late payments associated with the charge-off can lower your credit score quite a bit, too.

The two biggest influential factors of your credit score are payment history and amounts owed. Amounts owed make up 30% of your credit score, and it takes into account all of your total debt. If you have negative debt that isn’t being paid, not only do the missed or late payments hurt your credit score, but the debt is still contributing to your total amounts owed. Paying the charge-off in full can lower your total amount owed and stop collection efforts from your creditors and collection agencies.

Many borrowers wonder if it’s worth it to pay a charged-off account, and the answer is yes. You still owe the money, and even if you don’t pay the full amount, paying some of it can help. Paying the amount in full stops any further credit damage from that account.

If the charged-off account was sent to a collection agency, you need to pay them. The original creditor of the account doesn’t have the account anymore, so you can no longer reach out to them. Once you pay the account in full, the collection agency lists the account as “paid collection” on your credit reports.

It’s still listed as this on your credit reports for up to seven years, but it’s better than an unpaid balance that’s hurting your amounts owed and payment history categories. Seven years from the date they were reported, that account falls off your credit reports, along with the missed or late payments that caused the charge-off.

Can a Charge-Off Be Removed?

Charge-offs can be removed, but only under certain circumstances. One instance where you can remove a charge-off is if it was reported in error. In this case, you'll need to notify your credit reporting agency to dispute the error. Another instance would be entering a pay-for-delete agreement with your collection agency. This is essentially paying some or all of your debt in exchange for the removal of the charge-off. Not every collection agency offers pay-for-delete agreements, but if they do, be sure to get the agreement in writing before proceeding.

Step-By-Step Guide: How to Remove a Charge-Off

Step 1: Review Your Credit Report

You'll have to get your hands on your credit report before you can take any action. Once you've obtained your credit report, you should review it to look for any errors.

Step 2: Dispute Any Inaccuracies

If you've encountered any erroneous charge-offs, you'll have to formally dispute them with your credit reported agency. They'll have 30 days to investigate and amend the reports.

Step 3: Negotiate with the Creditor or Debt Collector

If the charge-off(s) on your report weren't there in error, you'll have to negotiate with your creditor. Pay-for-delete programs can be a good way to remove charge-offs if you can afford it and your collection agency offers them.

Step 4: Pay Off the Debt (If Possible)

Even if you can't enter a pay-for-delete agreement, settling for paying a lower amount will mark the charge-off as "settled," which is still an improvement.

Step 5: Wait for the Charge-Off to Age Off (If Necessary)

Charge-offs can stay on your credit report for up to seven years, but making on-time payments in the meantime will help you rebuild your credit.

Repairing Your Credit After a Charge-Off

Many lenders, such as auto lenders, can view a borrower with one or more charge-offs as risky. However, taking on new credit and making on-time payments can be a great way to improve your credit after heavy damage. It can be hard to find a lender that can work around poor credit, though. But some lenders can do just that.

Car lenders that assist borrowers with bad credit and unique credit situations are called subprime lenders. Subprime auto loans are reported to the credit bureaus, so your payments can repair your credit.

They’re signed up with special finance dealerships and specialize in reviewing a borrower’s complete financial situation instead of just their credit reports. You’re more than just a credit score – your income and overall living stability are important to a subprime lender, too.

While taking on more credit while you have a bad credit history sounds counterintuitive, it’s not. One of the top ways to improve your credit score after a charge-off is to pay off bad debts.

What to Do if a Charge-Off Can't Be Removed

A "settled" or paid" charge-off looks better than an unpaid one. Paying off as much of the charge-off as you can, paying your other credit card bills on time, and keeping a low revolving utilization will help you win back some favor with the credit bureaus, even if the charge-off can't be removed.

The Bottom Line

With some time, patience, and timely payments on new credit, you can improve your credit score. Credit reports aren’t set in stone – they’re ever-changing, and you mold them with your actions and spending habits.

Finding a dealership that has bad credit lending resources isn’t always easy, so we want to help with that! Here at Auto Credit Express, we’ve already done the work of creating a nationwide network of dealers that are signed up with subprime lenders. Get connected to one in your local area by completing our free car loan request form.