Charge Off

What are Charge-Offs?

Charge-offs are non-paying loans or credit accounts that have been written off as losses. Merchants report the charge-offs to the credit bureaus.

To recover some costs, merchants typically sell these delinquent accounts to collection agencies. The collection agency pays the merchant a fraction of the value of your debt--usually about half of what you owe.

The collection agency then attempts to collect more than they paid for the account. The merchant no longer has an interest in the debt.

Once you pay a collection agency there is no incentive for the merchant to report your payment to the credit bureau.

If you can pay the entire balance, it is often to your benefit to pay the merchant directly. You can then contact the credit bureau to investigate the negative item. The credit bureau will contact the merchant. With a positive response from the merchant the credit bureau will remove the negative charge-off from your record.

You can often negotiate with a merchant to pay a major portion of your account and have them consider the account paid. Tell the merchant your honest financial situation and that you really want to pay what you can. If the merchant agrees, be sure the have the merchant report your account as "Paid as agreed" to the credit bureaus. Even statements such as "Paid" or "Settled" will go a long way on your credit report.

Even without your effort, charge-offs are typically dropped from credit reports after 6 or 7 years.

Credit Report Scores - Computing Then

Your credit report scores are based on factors that appear in your credit reports:

• Bill payment history (Good: on time and for the full amount)
• Total outstanding debt (Good: non-mortgage loan payments less than 5% of gross income)
• Types of debt (Good: mortgage, car loans, Bad: high credit card debt)
• Length of credit history (Good: 3 or more years of on time payments)
• Credit inqueries (Bad: many rejected applications)

The Equal Credit Opportunity Act (ECOA) prohibits certain factors from being used in determining your credit report score:

• Personal details such as sex, marital status, age, race, national origin, or because you receive public assistance income
• Sources of income such as regular alimony, child support, or separate maintenance payments

The Equal Credit Opportunity Act provides actions for you to take if suspect unauthorized factors are being used to deny you credit.

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