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How to Repair Credit After a Lender “Charge Off”


Posted on December 22, 2010

 

If you experienced financial difficulties at some point in your life which made it impossible for you to make payments owed to a lender – after awhile, it’s possible the lender “charged off” the account.  You will need to work on credit repair after an account is charged off.

What is a Creditor Charge-Off?

When a creditor considers an account as being in charge-off status, they are essentially considering the debt as uncollectible so late in the game. The chances of a consumer paying off the total debt are slim to none. At this point, the creditor will charge-off the account, meaning they will write off the debt for their own tax purposes and claim the loss.

While the debt may be gone in the eyes of the creditor as far as collection goes, the debt you have incurred with the creditor is still very much legally collectable provided the debt is still valid. At this point, a creditor will seek out the services of a debt collector to pursue the debt.

Unfortunately for the consumer, a charged-off status will show up on your credit report and is bad news if you wish to pursue financing in the next seven years. It is about the worse mark you can get on your credit report and lenders do not take kindly to your inability to meet financial obligations extending this far past due. You will be noted as a credit risk and find it hard to get credit for many years to come.

How to Deal With a Charge-Off

Ideally, all consumers should strive to repair their credit before a charge-off is reported to the credit bureaus. It is in your best interest to request copies of your credit reports and see where you stand. Make every attempt to negotiate the balances you owe to get current with your creditors before being sent to collections. Many creditors will be willing to take lesser amounts in order to settle the debt. Marks on your credit report will not be great but a settled account looks better to lenders than doing nothing at all.

If you have reviewed your credit reports and found that an account has been inadvertently reported as being in charge-off status, it is essential that you dispute the item with the credit reporting bureaus as well as the creditor or collection agency to have the item removed as soon as possible. Repairing inaccurate information on your credit report can significantly improve your three digit credit score, especially where a charge-off account is concerned. Since credit reporting agencies are susceptible to human error, it is always wise to regularly check your reports for such errors.

If a charge-off is correct, there is no way to remove the mark on your credit report, even if you make an attempt to pay off or settle the debt after the fact. It is mark that will drop your credit score and present you as a credit risk for future financing. If you have more than one creditor reporting a charge off, it is very important you still attempt to improve your credit score and repair your credit history in every other aspect. Seven years is a long time to wait out bad credit news so be proactive about your credit monitoring and credit repair activities.

Credit Repair Activities After a Charge Off

First, get a copy of your credit report to view the account and how it is listed on your credit report.  See how much you still owe on the account, and how much of it is listed as “past due”.
Can you pay the account in full now?  If so, contact the creditor and find out how to make payment and how long before the information is corrected on your credit report.

If you do not have enough money to pay for the account in full, contact the lender or the collection agency handling the account and find out what your options are.  Sometimes they will accept a payment plan toward paying off an account in charge off status; other times they require a lump sum payment.  If they do accept payments, ask whether or not they will also update the account on your credit report to show you are making payments.  This would show any other companies viewing your credit report that you are making good on this debt – although your credit score itself would not likely improve until the account is paid in full.

 

Settlement of a Charge Off Account

For accounts with large balances which have charged off, you may want to consider “settling” the debt with the lender.  Sometimes you can make arrangements to settle an account for much less than you actually owe.  You might consider this route if you are unable to come up with the full amount to pay the account off, as the damage to your credit score has already been done.  Normally, a debt settlement will lower your credit score, but since the account is already in a charge off status, settling the account for less than you owe is not going to hurt your credit score any further – making it a reasonable option for starting credit repair after an account has charged off.

You can expect most lenders to accept 70 cents per dollar owed; or perhaps as low as 50 cents per dollar owed in the form of a settlement.  If they agree to your proposed settlement amount, get it in writing, including a notation that says they will update your credit reports to show the account as settled, paid as agreed.  Once you’ve taken care of this settlement payment and your credit report has been updated – you will begin to see your credit score improve as you make your other payments on time.

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