Charge-offs and You

A charge-off is when your debt is significantly late and the creditor has considered it a loss. In one sense, you may think that this is a good thing, the company has considered your debt a loss and it has been eliminated. This is where you’re wrong, a charge-off can be very damaging to your credit. Here are some important things you need to know about your charge-off.

 When does a charge-off happen?

How long is a significant amount of time? Generally, a charge-off happens after 180 days of not receiving payment. There are some installment loans that can be charged-off after only 120 days. In some cases, there are accounts that can be charged-off even when making payments, usually that is when the payment is below the minimum payment.

 Do I still owe the debt?Charge-offs

The simple answer is yes. Just because the debt has been charged off by the creditor, it does not mean it has been cleared. Your creditor is still owed that money. They can choose to use an internal collections service or even pass the debt to an external collection company.

 What do I do now?

Since your debt has been charged off it has left a black mark on your credit for seven years. Combined with the missed payment reports your credit score may fall dramatically. However, you can soften the effect of charge-off by paying the debt in full. This will help by showing “charged-off and paid in full” rather than “settled for less than full balance” or worse, that you haven’t paid the debt at all. Better late than never. Not all hope is lost, if you’re having difficulty making payments, consider debt management or even credit counseling. If the debt was due to a layoff or medical emergency, consider speaking with your creditor. It helps if you can provide a solid history of on-time payments and provide a reason for falling behind.

Understanding Late Payments

You paying your bill late may not be a big concern, but to creditors it is. Late payments cost you, not only in possible late fees and overdraft fees, but also by damaging your credit score. One of the most important things you can do to keep your FICO score in good standing is paying your bills on time. One of the largest factors in determining your FICO score is payment history, continued late payments will keep your score low.

don't be lateBeing a little late one time, causes little damage that you can easily rectify. However being late more than 30days or even up to 120 days will drop your credit rating by up more than 100 points. Being 30 days late will only do damage if it is reported by the lender to credit score companies. 60 days late will go on record as “currently late 60 days”, if you’re late often it can cause long-term damage. At 90 days late you’ve caused serious damage to your score, this will stay on your credit score for 7 years. While 120 days does not do more damage to your credit than 90 days, you do run the risk of your account being sold to a collection agency. Once that happens it is reported to credit score agencies and lowers your score by more than 100 points.

When you go beyond 90 or 120 days late the account will go into collections, which will either be an internal collection department or a third-party agency. It may seem like there is no way out once you get to this point, but that is not the case. The first step is to start paying the bills on time. Once you have made the payments and are caught up, check your credit report and make sure those lenders are reporting you as current.

The Importance of Good Credit

The economy runs on credit, more so good credit. If you want to be able to get a mortgage loan, car loan and even in some cases a job you need to maintain good credit. Creditworthiness is defined by your credit store and is the key to your financial life. Your credit score is used to determine what rates you’ll pay for big purchases such as auto and home. Good credit can also be the determining factor on whether you will get the loan or not. Bad credit will make it more difficult for you to get a credit card with a low interest rate, credit limit increases, and will make it more expensive for getting loans for any reason.

credit cards

Even if you’re not in the market for a loan, credit can have a major impact on other areas. Your credit information can be a factor when it comes time to rent an apartment, how much you pay for insurance, and in some cases certain jobs require good credit. Employers, landlords, and insurers use credit information as a guide to determine if people are reliable and responsible. Bad credit can suggest that you are a risk. However while bad credit may only show how you deal with debt some will use this characteristic of your financial life and apply it to other situations.

The most known type of credit score is a FICO score. FICO is short for Fair Isaac Corporation, and is considered to be the most accurate. There are three major credit reporting agencies Equifax, TransUnion, and Experian. These agencies also calculate credit scores based on their own statistical models. There are ways to improve your credit score, such as paying down debts, paying your bills on time, as well as monitoring and disputing possible errors on your credit report. Good credit can signify that your financial situation is on the right track.