Will Paying a Charge-Off Improve Your Credit Score?
A charge-off is one of the worst things that can happen to your credit score because it indicates a serious payment issue. This type of derogatory credit report listing is the result of missing your minimum credit card payment for 180 days, or six months.
After six months of missed payments, the credit card issuer declares your account a loss and writes it off as uncollectible. But that’s only from an accounting standpoint. You still owe the balance of a charged-off account and the creditor will still try to collect the past due balance from you and may even enlist the help of a third-party debt collector.
What Happens When You Pay a Charge-Off?
If you pay a charge-off, you may expect your credit score to go up immediately. You’ve cleared up the past due balance, your credit score should reward you for that, right? Unfortunately, it’s not that easy.
Paying a charge-off doesn’t remove the account from your credit report. That's because clearing up the past due balance doesn’t erase the fact that your account was actually charged-off. Paying a charge-off also will not improve your credit score – at least not immediately.
Over time, your credit score can improve after a charge-off if you continue paying all your other accounts on time and handle your debt responsibly. However, if you’re late again or you have another account charged-off (or something worse like a foreclosure or repossession), your credit score may drop even more and can take longer to recover.
The charge-off will eventually drop off your credit report whether you pay it or not. The credit reporting time limit for charge-offs runs out after seven years and 180 days from the date of the first delinquency that led to your account being charged-off.
The Benefit of Paying Your Charge-Off
Most people would only pay a charge-off if it meant they'd receive a subsequent increase in their credit score. You may be less inclined to pay your charge-off considering you probably won’t see an instant credit score boost. Even so, there other good reasons to pay your a charge-off.
A paid charge-off is always better than an unpaid one, especially if you plan to make any applications with companies that check your credit. Lenders, creditors, and other businesses are less likely to approve your applications if you have outstanding past due balances on your credit report. It sends the message that you may not pay any new accounts either. Once you pay the charge-off, you improve your odds of having your applications approved.
Negotiating a Pay for Delete
Some consumers have been able to negotiate removal of charge-off accounts via a process called pay for delete. In the process, you offer to pay the charge-off in full in exchange for having it removed from your credit report. Creditors are not required to do this, but occasionally do agree.
You can explain to your creditor the circumstances that led to you delinquency and ask that for a pay for delete. If you can negotiate a pay for delete (it can be a long shot), you’re more likely to see an increase in your credit score after the item is removed from your credit report.
How to Avoid a Charge-Off
Now that you know accounts are charged-off after six months of missed payments, take care to avoid such a serious delinquency. The further you get behind on your payments, the harder it is to caught up again. So get caught up on any missed payments as quickly as possible. If you foresee problems making your credit card payment, contact your credit card issuer as soon as possible.
You may be able to make a payment arrangement that would allow you to avoid a charge-off. Or, if you're having financial trouble, your credit card issuer may allow you to enter a hardship payment plan with reduced monthly payments.