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5 Quick Questions When It Pertains to Charge-Offs…
Understanding all the inner-workings of a credit report can get a bit overwhelming sometimes. Ever heard of a charge-off account? At first notice a charge off account sounds like something that could be considered positive, as if implying that a balance has been completely canceled, removed, or paid off. In all financial realism, the concept of a charge-off is actually quite egregious in nature, delving from the stand point that whenever an account is charged-off by a creditor, it is then written-off to profit and loss by a creditor from an accounting stand point. In a nutshell, here’s the deal about charge-offs: They can literally wreak havoc to consumers with good credit scores, but can mean even worst disaster to those with great FICOs. Financial questions abound. Below are five such questions you should be asking yourself about charge-offs:
#1 Exactly What Is A Charge-off?
So what’s a charge-off? Actually the word has two meanings: First, charge-offs from the stand point of the creditor simply means a certain amount of debt (be it a revolving or installment account) is unlikely to be collected; therefore, it has been written-off to profit and loss. Second, profit and loss is an accounting term, and simply means the original creditor has written off the debt on its taxes. In essences, when an account has been written-off to profit and loss, the account has been effectively bought by US government.
#2 How Does It Happen?
A charge-off is the result of some kind of inaction in time—that is, to say, over a period of time most debt are charged off at the 180 day period mark. So, what a charge-off represents to a consumer is simply a series of events of lack of payment. Perhaps you fell behind on your credit card for reasons unknown to many. One thing, however, is for certain: A charge-off is the real deal when it comes to credit repair, as the credit mark can mean a great deal of damage to those trying to restore his or her credit back to normal standards (As a side note: Debts can be charged-off even if payments have been made, providing that all of the payments were below the account’s monthly minimum).
#3 Am I still Liable for this Debt?
The answer to this question is a resounding yes; and here’s why: Most of the times when a debt has been charged off by a creditor, it then gets sold to a third party debt collection agency. This collection account now has the legal right to force you to make good on paying the debt...and they will indeed do this until you do one of two things: 1) Pay the debt off in full; or better yet 2) Discharge the debt in Chapter 7 bankruptcy. Still further, creditors still retain the right to collect the full amount of the debt and have a variety of options available to them to do so.
#4 How Does It Affect My FICOs?
Ideally, a credit report with very high FICOs should reflect an image of pristine personal financial behavior. On the other hand, consumers with a great number of charge-offs confer an image of abject irresponsibility. Why is this so? It’s simple: From the stand point of FICO’s scoring model, at least, a credit report that has a vast number of charge-offs on it says two things: 1) Not only have you been reluctant to pay your bills on time each month, but; 2) You failed to do so for a 180 day period, which is the time period that an account has before it officially charges off. So the impact to your FICOs can be quite devastating to say the least.
#5 What Can Be Done About It?
Alas, getting a charge-off removed from your credit report (at least in the early stages) isn’t something left for the novice credit repairer; and quite frankly, can be an insurmountable task even for a seasoned credit repair expert. The reason is simple: A charge-off denotes the fact that you were quite irresponsible at one point, and rightfully should be punished by FICO’s scoring model. To put it more concretely, the only thing that can be done at this particular juncture is to offset this bad behavior with some kind of good behavior, such as paying off the charge-off balance in full, keeping your credit utilization below 30%, or better yet, applying for better quality credit cards.