What is a charge-off, and how long does it stay on your credit report?

To put it simply, a charge-off is one of the most serious and damaging entries on an individual's credit report. Such an entry can complicate future borrowing potential and can stay on the borrower's credit reports for years.

It brings down the credibility and creditworthiness of individuals. Furthermore, it clearly signals to lenders that you have defaulted on repayments earlier. It also hampers access to future personal loans, home loans, and credit cards. Here’s what you need to know.

What is a charge-off?

• A charge-off occurs when a lender writes off your account after six months (or more) of missed payments.
• It does not mean debt forgiveness—you still owe the amount.
• Lenders may continue collections or sell the debt to third-party collectors.
• A “credit card write-off” is simply a charge-off specific to unpaid credit card balances.

Does a charge-off hurt your credit?

• Yes, it lowers your credit score sharply because payment history makes up a big share of scoring models.
• Lenders view charge-offs as a red flag for high-risk borrowing.
• It can make new credit cards, personal loans and home loans difficult to secure.
• Even if these credit lines, such as personal loans, home loans, or credit cards, are secured, they will have high interest rates and less flexible repayment terms.

How long do charge-offs stay on credit profiles?

• Generally, charge-offs stay on your credit report for 7 years. The initial date is the first missed payment resulting to a default.
• It is crucial to acknowledge that even if you later clear out the payment, the initial entry will not be completely removed from your credit profile. Still, it might be updated as ‘paid’ or ‘settled’ in the records.
• The only case where the removal is entirely possible, before expiry, is when the entry itself is wrong and completely inaccurate factually.

What can you do to remove an inaccurate and factually incorrect entry?

• Dispute inaccuracies: Wrong dates, amounts, or accounts can be challenged with the bureau. These challenges can be followed up with ‘complaint numbers’ provided to individuals who raise disputes with their respective credit bureaus.
• Goodwill request: Some lenders may agree to remove or reclassify after settlement. To discuss this properly, follow the predetermined guidelines in such cases. Still, success is not guaranteed.

5 key steps towards rebuilding credit after a charge-off

1. Focus on clearing out any outstanding debts to stop further collections.
2. Pay all future personal loan EMIs, home loan EMIs, and credit card bills on time.
3. Try to never depend on debt. Ensure that you keep card utilisation under 30%.
4. Use secured credit cards and build a solid credit history. Never miss payments.
5. Monitor your credit report to track progress. Ask and clear doubts in case you see any errors in your reports.

In conclusion, charge-offs last seven years, but their impact reduces with time. Discipline, composure, on-time repayment, and monitoring can help you restore your score sooner.

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