What is a charge-off?
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A charge-off is a debt that a creditor has given up trying to collect on after the debtor — the person who borrowed the money — has missed payments for several months.
When you have any type of debt payments to make, you could potentially end up with an unpaid charge if your account becomes delinquent. This could happen with credit card debts, or with installment loans like an auto loan, personal loan or student loan.
Regardless of the type of debt, a charge-off means that, as a last resort, the creditor can decide that the debt is a loss for the company and designate it as a charged-off account, or “charge-off.”
How much can a charge-off affect your credit?
Think back to the months before your account was officially charged off — you probably missed a number of payments. These missed payments alone can significantly damage your credit, because payment history is a major factor in determining your credit scores.
But your scores will most likely suffer further if the account is finally listed as a charge-off because of that derogatory mark.
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Next, if your account is in collections, it could also lower your scores. And not paying the collections agency can further damage your credit, because the agency can report missed payments to the credit bureaus.