If you had every intention of paying your debt but fell on hard times, you have plenty of company. Americans collectively have hundreds of billions of dollars in credit-card debt. That others might wind up defaulting on their credit-card debt is of little comfort, however, when you think of the damage a charge-off can do to your credit score.
Also called a charge-off, creditors will designate your debt a write-off when they believes they have no more hope of collecting the money you owe. For the creditor, the write-off means recording a loss in the books and ending collection efforts. However, this doesn't mean you can just scratch the debt off your list and never pay it. You still owe the creditor the money you promised to pay, even after the debt has been charged off.
A write-off or charge-off represents a significant ding to your credit report. This negative mark shows other creditors that you do not pay your bills as agreed. In fact, creditors typically view this as far worse than late payments. If your credit report lists late payments, some creditors will deny you, but others may give you a chance because they see that you do pay eventually. With write-offs, a creditor knows it must take a gamble to extend credit to you.
Even after writing off your debt, a creditor may try to get some of the money you promised to pay. Often, creditors do this by selling the debt to a collection agency. By doing so, the creditor gets at least some money versus taking a total loss. The collection agency can then begin efforts to collect the money from you. Some agencies will even go so far as to sue debtors for the money they owe.
Write-offs contribute to bad credit. The more write-offs and late payments you have on your credit report, the lower your score will drop. This will make it difficult to get new credit. Even worse, the negative information will remain on your credit report for seven years. Though you might clean up your act a few years down the line, the negative information can continue to affect your life. In addition, if a collection agency wins a lawsuit against you, it may use property liens and wage garnishments to collect its money.
Paying Your Debt
It can be beneficial to pay a charged-off account, despite the fact that it has already hit your credit report. You can negotiate with the creditor or collection agency to mark the account as paid. Though in most cases the account will still show as a collection or write-off, adding paid to it makes you seem a bit of a better risk to creditors. Paying your accounts off also protects your property, including your home, and your paycheck from lawsuits.
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