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What is a Charge-Off?
A charged-off account refers to an account held by a creditor that has not been paid by a debtor. The creditor has stopped collection efforts and designated the debt as uncollectable.
How does a Charge-Off Work?
Once a lender considers collection efforts to be hopeless, it would opt for a charge-off. This generally happens within six months (180 days) of the debtor not making any payments to the creditor. It is the role of the lender to determine whether a consumer debt is uncollectible. The unpaid debt is generally reported on the debtor's credit report. An adverse effect of a charge-off is compromised creditworthiness due to the negative information on the debtor's credit report. This may result in difficulty in getting a loan approval or obtaining a loan at a reasonable rate. Whenever a customer is paying arrears, the charge-off status is never removed from the consumer credit report. Instead, the situation is reported as paid. In such a case, the debt remains in the credit report for seven years.