Removing a Charge-Off From a Credit Report

Maintaining a good credit score is essential to building a sound personal finance portfolio. People with excellent credit have a consistent history of keeping debt within reasonable limits and paying bills on time. They are rewarded with a good score and decent interest rates, among other perks. A regular habit of making late or partial payments eventually results in collection activity and negative credit report entries. When a borrower stops paying altogether, most creditors will write off the account as bad debt, otherwise known as a charge-off.

Creditors use charge-offs as a last resort when a borrower stops paying a credit card, personal loan, or other debt. At that time, the debt is moved to the creditor’s bad credit ledger and the charge-off is reported as a derogatory remark on the credit file. Although a lender may write off a debt, it doesn’t end there for the borrower. A charge-off does not make the debt disappear. Removing a charge-off from a credit report is possible but there are no shortcuts in the process.

Charge-off Facts

Most creditors do not resort to writing off debt until months after the borrower stops paying. Before initiating a charge-off, the lender makes numerous attempts to get payments caught up on the account. Borrowers are charged late fees to deter payment delays. Creditors also call with friendly (and progressively unfriendly) collection calls and letters. Usually, the creditor writes off the bad debt 180 to 240 days after the last payment, although the statute of limitations for collecting debt varies by jurisdiction.

The lender still has a legal right to collect on the bad debt after a charge-off. The unpaid account can be moved to the company’s internal collection department, which will attempt to collect the debt by any legal means. Collection activity can include anything from phone calls and letters to obtaining a civil judgment for the amount owed plus legal fees.

The creditor also has the option to sell the debt to a third party collection agency. When this happens, the agency will contact the borrower to inform them of the transfer of debtor. In this instance, the collection agency takes the place of the original creditor. Some collection agencies are more aggressive in their approach, while others try to make payment arrangements or settle for a portion of the debt. In the meantime, the charge-off becomes a part of the borrower’s credit file.

How Charge-Offs Affect Credit

By the time an account is written off, the borrower has missed several payments. The creditor has reported the delinquency to the credit bureaus, which means that there has already been a drop in credit score. If the debt has been turned over to a third-party collector, this agency can also report to credit bureaus if it remains unpaid. The problems only become worse if the borrower continues to ignore collection efforts.

A derogatory mark is one of several negative account entries in a credit report. A charge-off is one of the more serious derogatory marks and can stay on credit reports for seven to ten years. For people with lower credit scores, a derogatory mark or public record (bankruptcy, civil judgment, or tax lien) has a huge impact on their ability to get credit or reasonable interest rates. Fortunately, borrowers can work toward removing a charge off or any negative credit history from their record.

Proactive Steps

Borrowers having difficulty making payments should communicate with their creditors as soon as possible. Generally, lenders will try to work with customers to bring accounts current long before the need for collection or charge-off activity. Some borrowers discover they are too far behind and the creditor has already started collection efforts. If so, they can start to recover by doing the following:

  • Contact the original lender to see if the account is with their internal collection department. If so, regular customer service is unable to discuss the account but will refer the customer to a representative from collections.
  • Have documentation available to support the delinquency explanation (divorce papers, job lay-off notices, etc.). 
  • The borrower should be honest about how much they can afford each month. They should not agree to a payment that they cannot maintain. 
  • Call the appropriate number and try to make payment arrangements to pay the balance, which should be equal to what the borrower has in their records. If the debt is valid, the borrower should politely explain the reason for the delinquency and that they want to pay.
  • If arrangements are made, the creditor will probably ask for bank information to make payments by debit withdrawal.

If the original creditor has already sold the debt, that means they have written it off and will not discuss the account further. The borrower will receive a letter from the third-party collection agency. The letter should contain specific and accurate information such as the borrower, the original debtor, the amount that is owed, and the charge-off date.

From that point, the borrower will deal with the collection agency and proceed as outlined above. Any payment arrangements should be affordable and paid on time. Eventually, the credit report will reflect accounts that are paid in full. Over time, borrowers should see their credit scores rise as long as they keep all other credit current and limit their debt.

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What Borrowers Should Know

Bad credit can happen to anyone; most people have had credit problems at some point in their lives. But unlike in the past, charge-offs and other credit issues do not mean automatic rejection for all types of financing. Lenders are aware that a large number of applicants have dents in their credit. Creative financing is utilized on a daily basis to help people to get mortgages, auto loans, and credit cards.

However, bad credit financing does come with very high costs in terms of interest and fees. Ideally, borrowers should work hard at removing a charge-off or any other derogatory mark from their credit. Below is some helpful information for people with credit issues:

  • Credit bureaus have recently agreed to more stringent public-record standards which may mean fewer public record entries on credit reports.
  • Every jurisdiction has laws in place with regard to collection practices. Borrowers should become familiar with them and report any unfair treatment to the proper authority.
  • Checking the credit report on a regular basis must be done in order to spot any errors. Borrowers should take steps to dispute mistakes in the file right away. 
  • Borrowers must stay clear of credit scams that promise to remove a charge-off or other legitimate negative credit report entry. No one can pay to have validated unpaid debt simply erased from their credit file.
  • A verification letter should be received for every account that has been paid in full.

Left unpaid, a charge-off will stay on a credit report for at least seven years. The only possible ways to get it removed earlier are paying it off, creditor settling for a lower amount, or filing bankruptcy – which is an even more dire set of financial circumstances. Cleaning up credit does take time and effort. In the meantime, borrowers can spend that time learning as much as possible about managing their finances to avoid credit problems in the future.

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Smarter Loans Staff

The Smarter Loans Staff is made up of writers, researchers, journalists, business leaders and industry experts who carefully research, analyze and produce Canada's highest quality content when it comes to money matters, on behalf of Smarter Loans. While we cannot possibly name every person involved in the process, we collectively credit them as Smarter Loans Writing Staff. Our work has been featured in the Toronto Star, National Post and many other publications. Today, Smarter Loans is recognized in Canada as the go-to destination for financial education, and was named the "GPS of Fintech Lending" by the Toronto Star in 2019.