Learning about credit reports and understanding the scoring formula can help you get better credit scores.  Even if you have faced credit challenges or made some unwise choices in the past, your credit rating can recover.  And you can help it grow by making sure your credit report is accurate.  Remember, more than 79% of credit reports contain errors and many errors we identify on our clients’ reports show up in the category of Charge Offs.

WHAT IS A CHARGE OFF?
When an account has not been paid for a period of time, the company can determine that it is uncollectible and writes it off as “bad debt”.  This falls under standard accounting practices and usually happens when the account has been delinquent for a period of six successive months.  It is sometimes reported on the credit report as “Profit and Loss” or “Charged off to P & L”  which come from common accounting terms.

A Charge Off is a negative event to the scoring formula and usually has a severe impact on credit scores.  Additionally, the late payments attached to the Charge Off often have a significant impact on credit as Payment History is the number one factor in scores.

HOW IT’S REPORTED
Typically, there will be several late payments listed on the credit report with an account that has been charged-off.  There will be five or six months’ worth, getting progressively more delinquent as the time goes by: a 30 day late, then a 60 day late, then a 90 day late, etc. 

NOTE: The company can report late payments after the charge off because the unpaid account is technically overdue.

There is usually a money balance due on the account and it can continue to grow each month if the company charges late fees and overlimit fees.  Often a Past Due Balance is reported along with the regular account balance.  A Past Due Balance is an additional negative item counted against the scores.

TO COLLECTIONS
After a period of time, a company may sell the account to a collection agency.  If the collection agency chooses to pay the credit bureaus as a monthly subscriber, they can then report the account on the credit report, too.  The Date Opened should be when it went to collections.  The Date of Last Delinquency should be the last late payment date that the original creditor/company reported. 

HOW LONG IT STAYS ON CREDIT REPORTS
According to the Fair Credit Reporting Act (FCRA), the charge off and its related late payments can stay on for seven years plus six months from the date of first delinquency that led to the charge off.  So if the first missed payment was in January and no payments were made ever again, each month would have a subsequent late payment with the charge off status likely reported in June (six months later).  January of that year would be when the 7 1/2 year reporting period starts because it was the first delinquency in the succession that led to the charge off.

NOTE: Any late payments on the account in earlier years, NOT in succession to the charge off, should be removed 7 years after the date it occured.

COMMON ERRORS
When the charged off account is transferred to collections, the account balance should only show up on ONE account, the most recent one.  If both the original company AND the collection agency are reporting a balance on the credit report, that’s an error.  It can only be listed on the most recent account, in this case – the collection agency. 

After a period of unsuccessful collection attempts, one collection agency may sell it to a different collection agency.  Again, only ONE of them can report the balance on the credit report.  Sometimes we see the same account listed by four or five different collection agencies on one credit report.  If all of them are still showing a balance due, all but the most recent owner of the account are reporting inaccurately.

NOTE: The Statute of Limitations on credit reporting is NOT the same as the Statute of Limitations on debt collection, which varies from state to state.

Late payments should not continue to accumulate on the original account after it has been transferred to the collection agency.  It is no longer their account, it is no longer overdue to them.  NO late payments on original account after it goes to collections.

Collection accounts reporting AFTER the 7 1/2 year reporting limit is a common error on credit reports.  Often the collection agency dates listed under Date Account Opened are much more recent than the delinquencies on the original account that the collection is for.  When the collection agency does not list the Date of Last Delinquency OR changes it to a more recent date, the account looks much newer than it is and stays on credit reports longer.

NOTE: If there is a collection account on the credit report for Sears and there is not an original account reported by Sears anywhere on the report, chances are the collection is past the reporting time limits.  When the original account can no longer be reported, it usually means the related collection accounts can’t be reported either.

FINAL THOUGHTS
A Charge Off is a negative item, but it does not mean your credit rating won’t recover.  Minimizing the negative impact by assuring it is reporting accurately is something you CAN do to help your Financial Fitness.