A "Charged-Off" Account: Is It a Good or a Bad Thing?

Some people may be inclined to feel relieved when they hear that their debt will be "charged off". After all, it's a debt they've been having trouble repaying and if it's "charged off," at least they don't have to pay it, right? Actually no--that's wrong. In fact, one of the worst things that can happen to negatively affect your credit worthiness and credit score is having your debt "charged off." Although lenders benefit from this event in several ways, as the debtor, this will not do you any good, now or in the future.
First, let's look at why it means to have a debt "charged off." Creditors will often resort to "charging off" the balance when they realize that your account is so far behind that you will likely not ever make further payment on it. What this means is that they can now report this as a loss for tax purposes and the amount can be subtracted from their yearly reported income. By getting a tax break for it, creditors get to turn an unpaid receivable into something positive.
However, for you, the debtor, this "charge off" action will show on your credit report for seven years. This can seriously affect your ability to get a loan or line of credit from another lender because the charge off can remain on your credit report as a negative mark, even if you decide to pay it. While there is no way to hide it, it's not the end of the road if a "charge off" does appear on your credit report because there are ways to overcome it.
To balance the negative "charge off" that potential lenders will see, it helps to add trade line or open accounts with positive information to your credit report. Lenders will see that the "charge off" was a one-time slip up--not a habit that you plan to continue - if there is a history of positive, paid on time accounts.
Also, paying the amount that was owed and then later "charged off" is also another way to let potential lenders know that while you may have gotten behind on your payments at one point, you still made good on your promise to repay the debt. While you should expect to receive higher-than-normal interest rates on any line of credit you receive until the "charge off" is completely gone from your credit report, this good-faith measure is often enough to help many lenders overlook the previous "charge off."

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