Let’s dive right into understanding what a charge off means. This term is mainly connected to credit reports and it has a significant impact on a person’s financial health.
Definition of a Charge Off
A charge off, in financial parlance, refers to a situation where a creditor or lender writes off a debt that is deemed uncollectible from the borrower. This usually happens after the borrower has been significantly delinquent on the debt or loan for a certain period, typically 180 days or about six months. However, it’s important to note that it doesn’t absolve the borrower from the debt obligation. In other words, the borrower does not get off scot-free.
How Does a Charge Off Happen?
A charge off happens when a debtor stops making payments on a debt for a long period. The lender or credit card issuer will then conclude that the debtor is unable or unwilling to fulfill the repayment obligation. As a result, the debt is declared a “charge off” and it is treated as a loss in the company’s financial records.
However, this does not mean you’re out of the woods. Once a charge off occurs, the account may be transferred or sold to a collection agency. The agency may then take up aggressive tactics to recover the money, including legal actions or wage garnishments.
Impact of a Charge Off on Your Credit
A charge off has negative impacts on your credit. This is because, when a charge-off occurs, it gets listed in your credit report and would largely lower your credit score. It shows future potential lenders that you have had trouble paying off your debts in the past, which makes it harder for you to borrow in the future.
To put into perspective, having a charge off on your credit report is one of the worst items to have. It stays on your credit report for seven years and can be a major red flag to future potential lenders whether you’re applying for a credit card or a loan.
How to Handle a Charge Off
The best way to handle a charge off is to avoid one in the first place. But if you already have a charge off on your credit report, you can work towards resolving it by either paying the debt or negotiating a settlement.
If it’s a mistake, dispute the charge off with the credit bureau. If it’s valid, you can pay it in full or negotiate a payment plan with the lender or the collection agency. Always get any agreement in writing.
Importantly, seek advice from a credit counselor or a financial adviser. They can guide you on the best approach to take to manage your debts and improve your credit health.
Remember, your financial health is crucial and it’s in your best interest to understand and navigate these areas responsibly. Always take actions to ensure that a charge off doesn’t occur, by paying your debts on time, and keeping up-to-date with your financial obligations.