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Read on to learn more about charge-offs, including how they affect your credit.
What Are Charge-Offs?
Charge-offs occur when a loan or line of credit has been in a delinquent state for an extended period of time (usually between 120–180 days). Typically, a creditor will send you letters to notify you of past-due charges before moving into the collections process and marking your debt as a charge-off. Charge-offs may also occur if you have been making payments lower than the minimum monthly amount.
The good news is that when a creditor does Charge Off the debt, the next step is selling the account to a Third Party Collection Agency. Once the account is in collections many Federal and State laws kick in to provide some powerful protection. The most robust law is the Fair Debt Collection Practices Act. This protects consumers from unfair and deceptive collection efforts.
How Do Charge-Offs Affect Your Credit?
Charge-offs and late payments tend to go hand in hand, and both have an impact on your credit score. Data from FICO® shows that even a single late payment can negatively affect your score. Up to 35% of your credit score is based on your payment history, so it’s best to maintain some positive trade lines to offset any late payments.
What many people do not realize is that Charge-Offs have an immediate effect on your credit score, but as time goes on, they affect your score less and less. For example, if you have a recent Charge-Off it may drop your credit score by 50 points, but a Charge-Off that is a year or older may only drop your score 5 points. So, Charge-Offs are not as bad as they seem. Much like everything else, time heals all wounds.
What to Do if You Have a Charge-Off
If you have a charge-off listed on your credit report, don’t panic! You still have some options to help your credit score recover.
- Have at least 3 positive reporting trade lines. Having positive payment history will allow the score to recover in a relatively short amount of time, the more positive trade lines, the faster the score will rebound.
- Be Patient. Plan on waiting at least six months after a Charge Off to apply for any loans.
- Continue paying other debts on time and in full. Although a charge-off can have a negative impact on your credit score, continuing to pay your other debts on time will help improve your overall report.
Managing your credit score doesn’t have to be complicated. The team at Briteside Solutions is here to help empower our clients to become financial experts through education, practical benefits, and consumer protection. Visit our website to learn about our services or reach out to us by phone (888) 851-0646 or email firstname.lastname@example.org for more information.