Charge-Off Effect on Credit Report

Many readers send me questions regarding their credit scores. Usually the question is posed as, "If I take action X, what will the impact be on my credit score?" Unfortunately, credit scores are not like sports where scoring a goal results in a known number of points or rules infractions result in defined penalties.

If you have a pristine credit score in the 800s, any misstep however slight in your payment history will result in a greater impact on your credit score than if you have a credit score in the low 600s. Therefore, if you have a high credit score, and no other blemishes, it would be better for you to contain any damage as quickly as possible. This is especially true if you have immediate plans to apply for a loan, rent an apartment, or apply for a job where the employer has a policy of doing credit checks on employees.

However, if your credit score is already damaged, there will be little if any impact to your credit score if you settle a debt for less than the full balance, become delinquent on an account, or "max-out" a credit card.

For more detail on how credit scores are calculated, see the Bills.com resource FICO Score Calculation.

Charge-Off Effect on Credit Report

Your main issue in your question is whether it is better for a debtor, from a credit report perspective, to resolve a debt before or after charge-off. There is no one-size-fits-all answer to your main question. Each consumer will need to assess their situation and goals, and act accordingly. The short answer is, "it depends."

If you have a low or moderate credit score consider allowing the account to be charged off. Then after that charge-off, open a negotiation with the collection agent or the group at the original creditor that handles delinquent debt. Either will have the ability to negotiate a lump-sum settlement of the debt for less than full balance. However, as mentioned above, if you have a lofty credit score then settle the debt as quickly as possible to minimize the damage to your credit score.

The trade off of settling the debt for less than the full balance is the impact this will have on your credit score. As discussed above, this is not the tactic to follow if you plan to apply for a loan, rent an apartment, or apply for job anytime soon.

Find background for this analysis in the Bills.com resource Charge-Off & Credit Report. Review this resource if you need an understanding of charge-offs and credit reports.

Default

You asked about default, by which I assume you mean "Never pay." Resolving the debt is has lighter impact on your credit score than never paying a debt. Ignoring the credit score for a moment, a human reviewing your report will most likely give more weight to an unpaid account than a settled account.

Lien

A lien is the result of a judgment against the debtor. If reported by the judgment-creditor, a lien will have a significant impact on a judgment-debtor's credit score.

Seven-year rule

You asked how long derogatory items can appear on your credit report. Federal law (US Code Title 15, §1681c) controls the behavior of credit reporting agencies. This law is known as the Fair Credit Reporting Act (FCRA). Under FCRA §605 (a) and (b), an account in collection will appear on a consumer's credit report for 7½ years. The clock starts approximately 180 days after the date of first delinquency on the account. To learn when an account will be removed by the credit reporting agencies (TransUnion, Equifax, and Experian and others), add 7½ years to the date of first delinquency. Subsequent activity, such as resolving the debt, is irrelevant to the seven-year rule. However, if the debt is a tax lien, that can appear for seven years from the date of payment. A bankruptcy will appear for ten years from the date of the final order. Delinquent federal student loans can be reported indefinitely, i.e., for as long as they are delinquent.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com