A charge off is a major derogatory item on your credit report, and it will be detrimental to almost every future financial decision that requires a loan. Some people mistakenly think that it is a debt that has been canceled by a creditor, but that is generally a discharge. The two terms are commonly confused, but they are not the same thing. Here are a few questions we can answer here:
• What exactly is a charge off?
• What happens to my credit report with a charge off?
• How do I get rid of a charge off?
Charge Offs: What Are They?
A charge off is actually an accounting term for a “loss”–that basically means you aren’t likely to be sending in a payment, and you are still liable for the debt. This usually happens when an account is more than 180 days past due. The charge off remains on your credit report for 7 years, and if you pay it off, the status will be updated to “Charge off paid” or “Charge off settled.” The only way to remove the charge off is to wait the 7 years or try to negotiate with the creditor about having it removed when you pay the account in full.
Charge Offs: What Happens To My Credit?
When a charge off hits your credit report, sometimes it is followed by a lawsuit or it is given to a collection agency where it then adds a “collection” item on your credit report to go along with the charge off. Both of these are major derogatory items for your credit report and will affect your credit score negatively. Unlike a bankruptcy, these derogatory items continue to pile up. If the charge off eventually turns into a lawsuit, a third major derogatory item shows up as a judgment—that’s 3 major derogatory items over 1 debt! In order to qualify for loans (including a mortgage loan), any charge off needs to be settled.
Charge Offs: How Do You Get Rid of Them?
The best place to start to get rid of a charge off is to talk to the creditor (not the collection agency). The creditor is the original party with the charge off on their books, and they’re the one reporting the charge off to the credit bureaus. If possible, you can try to negotiate with the creditor to remove the charge off from your credit report once the debt is paid. Make sure you speak with someone who has the authority to remove the charge off so you don’t risk being told “no” by somebody who doesn’t have the power to remove it in the first place. Let the creditor know your intentions to pay the debt, and have them mail/fax you any documentation or agreements before you make the payment. After you pay the debt, you can check your credit report to see if it has been removed. If the creditor refuses to remove it, your choices are to either continue to let the debts pile up and negatively impact your credit score, or to pay it with a changed status of “settled” or “paid.”
Buy Again After A Charge Off
There is no such thing as an official waiting period of waiting to get a mortgage after a charge off. That said, if a charge off can be avoided, it is the best-case scenario. However, this is not always a reality, and having a charge off is not a complete albatross. Talk to the creditor and work to get it settled or removed completely. Ultimately, a “settled” or “paid” charge off does not immediately eliminate your chances at a loan, but it could affect interest rates and loan limits.
If you have a charge off in your credit history, be sure to speak with a loan officer about what this means about your ability to get a mortgage. A good loan officer can help you understand your options and show you how to buy again after a charge off.
