How credit card charge-offs impact your credit score and how to remove them

Without understanding its definition, the phrase "charge-off" may seem like you are forgiven for a charge and sounds similar to the term, "writeoff." But don't let this phrase fool you — charge-offs are derogatory remarks indicating that you've missed payments towards your credit cards.

You may find yourself in a situation where you're unable to make credit card payments on time, whether that's because money is tight, you're overwhelmed with sudden health expenses, simply forgot due to life's distractions or another reason. This is why it can be so important to monitor your credit and spending so you can keep track of where you stand. Using a free online tool like Chase Credit Journey^®, you can keep a closer eye on your credit score generated by VantageScore^® 3.0 and the factors impacting it.

When you fall too far behind on making your payments, you could see a charge-off appear on your credit report. Typically, this occurs after 180 days of missing your credit card's minimum payment, but could happen sooner than this.

Let's unpack charge-offs more so you can understand what they are, how they can impact your credit score and ways you can remove them from your credit report. 

What is a charge-off?

A charge-off is when the money you owe is seen as a loss to the lender — you still owe this amount, but attempts to collect it from you have failed. The lender may try to collect this debt through a collections agency.

A charge-off is considered a derogatory remark, which is a negative item that can appear on a credit report that serves the purpose of alerting potential lenders of your risk. It shows that you've frequently missed required payments and can hinder you from getting ideal rates or approvals for loans and credit cards. Charge-offs may appear on your report for up to 7 years, after which they will fall off.

Charge-offs are a symptom of a larger issue at hand, which is not making your payments on time, thus impacting your payment history, a major component to your credit score. You are also accruing debts that, over time, will cost you more on interest. You are still responsible for the debt, but your debt will be seen as a loss to the creditor. If you are able to settle your debts, your charge-off status may appear as "charge-off paid" or "charge-off settled," but may still remain on your credit report for 7 years. 

How does a charge-off affect your credit score?

Payment history is a major factor when it comes to calculating your credit score. It accounts for 40% of your VantageScore^® and 35% of your FICO^® score. As a result, when you miss your payments, your score will suffer.

A charge-off generally happens when you've missed about several months' worth of minimum payments, so by the time a charge-off appears on your credit report, your credit score has probably already dropped significantly (depending on what your initial score was). This is due to the fact that you've frequently missed payments, damaging your payment history in the process.

The exact amount your score will diminish depends on a few factors, namely:

• Your initial credit score (the higher it is, the more points you may be at risk of losing)
• How many derogatory remarks are already on your credit report
• Which scoring system (VantageScore vs. FICO score) is used to generate your score (you could see changes in both)

Difference between a charge-off and collections

Both charge-offs and collections are derogatory remarks that have to do with missing payments. Collections happen when you've missed payments, but there's an attempt to collect the debts from you.

Charge-offs, on the other hand, happen as a result of the debt being a loss. In a sense, charge-offs are worse for you and your credit score because it shows you were unable to make payments (sometimes this is the case even when a collections agency was brought in to assist). Note that in both circumstances, the debt is not forgiven. You are still responsible for paying off your debts, unless you've received a discharge in bankruptcy. 

How long does a charge-off stay on your credit report?

As mentioned earlier, charge-offs remain on your credit report for up to seven years. If the charge-off appears on your report as an error, however, you can remove it sooner.

Steps to remove an error from your credit report

If you review your credit report regularly, congrats! This is an effective way of monitoring your credit and being proactive about fixing potential inaccuracies. If you notice that a charge-off has been listed on your credit report and are certain it is an error, you can dispute the error with the credit bureau (Experian™, TransUnion^® and/or Equifax^®) or credit card issuer that issued your credit report. Let's break this down into steps.

Step 1: Prepare documentation

Prepare your documents for the dispute, such as receipts or bank statements. You may need to provide this information to the bureaus to show proof of inaccurate reporting. According to the Federal Trade Commission (FTC), you may need to provide the following information, including but not limited to:

• Negative items in your report that you're disputing (in this case, a charge-off)
• Facts, statements, information regarding these negative items
• An explanation of why it needs to be removed
• A request for removal
• You may want to include your report showing the items in question

Step 2: Report the inaccuracy to the bureau

You can report the error by snail mail, online or over the phone. Go to the bureau's websites and you can file your dispute there, or call them directly. Make sure you have all your information ready to share/distribute to back up your dispute.

Step 3: File a dispute with your issuer or lender

In addition to filing with the credit bureau, you, you can also file your dispute with your credit card issuer or lender from which you received your credit report. You can do this online or by sending a dispute letter explaining why you're requesting a removal. You'll want to supply supporting documentation and request to inform the bureaus that this information is inaccurate. 

Step 4: File a complaint with the Consumer Financial Protection Bureau

If all else fails, consider reaching out to the Consumer Financial Protection Bureau. You can file a complaint expressing your attempts to remove an inaccurate claim and why it needs to be removed. You can contact this bureau online through the website and click on "Submit a Complaint" to begin the process. 

How to rebuild your credit after a charge-off

As we've discussed earlier, charge-offs happen as a result of not making your payments on time. It hurts your payment history, which in turn diminishes your credit score. So, one way to help rebuild your credit after having a charge-off listed on your credit report is to begin making your payments on time and in full, if possible. You may want to work with your issuer to try to settle your account. While this may not dramatically change your score, it will put you on a path to a better financial future.

You may also want to consider:

• Enrolling in Chase Credit Journey — get access to resources that can help you better understand your credit score, what it means and how to improve it with the credit planning feature. You can also enroll in credit monitoring services to look out for suspicious activity.
• Utilizing a credit counselor — this is someone who can give you free advice to help you better manage your debt and make a plan to help settle your debts and improve your credit score.
• Adjusting your budget — take a deep dive into your spending habits and find places where you may be spending too much on nonmandatory expenses and not able to make your required payments each month. What can you cut? What can you make room for?
• Finding ways to build supplemental income — if you have the time and ability to do so, consider taking on additional work or finding a way to supplement yourself with more income. This way, you may be able to make your payments on a more regular basis. Many enterprising individuals take on a side gig, regular part-time work or simply turn to online marketplaces to sell items for extra cash. 

Bottom line

Charge-offs on your credit report can do some serious damage. Finding a way to help rebuild your credit as a result of a charge-off is essential for improving and maintaining a healthy credit score. By keeping a close eye on your budget, payments and credit score, you can be proactive about your personal finances and improve your score over time.