What is a Charge-Off and How Does It Affect Credit? | Fora Financial Blog
What is a Charge-Off and How Can It Affect Your Credit?
August 05, 2019

What is a Charge-Off and How Can It Affect Your Credit?

Among the many factors that can hurt your business credit, charge-offs usually have one of the most severe effects.

Since your payment history and the amounts you owe are generally the two most important factors that make up your credit score, a charge-off usually has a large, negative effect on your credit. This is partly due to the charge-off itself, but it’s also because — for a charge-off to occur — you have to miss several payments. Even without the charge-off, those missed payments will hurt your business credit.

Because having bad debts can negatively impact on your business credit, it’s important to understand what it is, how to avoid it, and what to do if it happens to you. In this post, we’ll review this information so that you can be aware of the risks that occur when you don’t pay off debt on-time.

What’s a Charge-Off?

A charge-off means that you failed to make the minimum payment on a debt you owed for a certain amount of time. With credit cards, that time period is 180 days, but it varies with other types of debt.

For a credit card issuer, your debt is considered an asset. However, if you don’t pay your debt after a certain amount of time, the IRS requires the lender to declare that the amount you owe as unlikely to be collected. To comply with the IRS and remove the debt from its list of assets, banks must “charge it off.”

Although it might sound like having a charged off account means your debt is gone, this isn’t the case. It just means that the lender can deduct your uncollected debt as a cost and reduce their taxable income.

Once a debt is charged off, lenders will either continue trying to collect it, sell the debt, or hire a debt collection agency to collect the debt. In any case, what you owe won’t change unless you reach a debt settlement. What might change is the debt collector itself.

How to Avoid a Charge-Off:

When you rack up credit card debt, charge-offs occur after the debt has been delinquent for 180 days. This means that, after you miss a payment, you have 180 days from the missed payment’s due date to make the payment and avoid a charge-off. If you fail to do so, the debt will be charged off which will stay on your credit report for seven years.

For this reason, if you’re struggling with multiple payments, it usually makes sense to pay off any debt that’s at risk of being charged off.

What to Do if a Charge-Off Happens to You:

Unfortunately, your options are limited when you’ve had a debt charged off. Regardless of what you do, it will remain on your credit report for seven years. That said, you should still make it a priority to pay off the debt.

While it’s true that the charged-off debt won’t accrue any more interest, having the debt paid off will show lenders that you tried to pay back your credit card debt. Not to mention, it’ll get collection agencies off your back which will allow you to focus on running your business and rebuilding your credit. After all, debtors have the legal right to come after you for up to 10 years, depending on the state you live in.

Other than paying off your debt, the best thing to do after a charge-off is to work on good credit-building habits like making payments on time and paying off debt in full. This will show credit bureaus that you’re responsibly maintaining your finances.


The higher your credit score is, the bigger the hit will be from a charge-off. However, regardless of your credit score, this event will affect you and your business for a long time, even if you pay it off. Unfortunately, there’s no getting around that.

That said, the best way to come back from a charge-off is to start today. While you work to get it removed from your credit history, build good financial habits. Start with a secured credit card or debit card, budget carefully, and make sure you’re ready for when your business credit recovers.

Fora Financial

Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.

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Fora Financial is a working capital provider to small business owners nationwide. In addition, the Fora Financial team provides educational information to the small business community through their blog, which covers topics such as business financing, marketing, technology, and much more. If you’d like to see a topic covered on the Fora Financial blog, or want to submit a guest post, please email us at [email protected].