Charge Off Questions
What is a charge off?
A charge-off is an unpaid debt on your account that has been cancelled by the creditor. It’s the result of not making your credit card payment for several months – usually six months in a row. The creditor writes off the debt as a loss, cancels your account, and demands the past due balance in full.
Does a charge-off on my credit report mean that the debt has been cancelled?
Many people mistakenly think when a debt has been “charged-off”, it means that it’s been cancelled by the creditor. Nothing could be further from the truth. In fact, a charge-off is one of the worst types of credit report entries. By the time your account is charged-off, it’s already been closed for several months, and the debt has been handed over to a debt collections agency for action.
Note that any debts you may have paid after they were charged off will not be removed from your credit report. If you pay the debt, it will be updated with a status of “Charged-Off Paid” or “Charged-Off Settled.” Either is better than a simple “charge-off” status, but it does not change the fact that you had become delinquent with the debt because it indicates that offering you credit involves an element of risk.
How long will a charge-off remain on my account?
A charge-off will remain on your credit report for 7 years from the date it was charged off. In total, the account remains on your credit report for seven and a half years. Once you pay a charge-off, the listing isn’t erased from your credit report, at least not until it’s more than seven years old or until you negotiate its removal.
What is a hard inquiry?
A hard inquiry generally occurs when a financial institution, such as a lender or credit card issuer, checks your credit report. Let’s say you apply for a car loan or credit card and the lender requests your credit report and score from Experian. The fact that your credit information was used by a particular company will be noted on your Experian report with the date, name of the company that requested it, and the type of inquiry.
What is a soft inquiry?
You perform a soft inquiry every time you check your credit score. A soft inquiry also occurs when an employer or governmental agency checks your credit report. Whenever lenders review your report and invite you to apply for their cards or services it is always a soft pull because you did not initiate or authorize them to look at your credit report. These types of inquiries will have no impact on your credit score, no matter how many times they are performed. The only time an inquiry is not a soft inquiry is when you authorize a lender to look at your credit report. So if you accept a pre-approved credit card, a soft inquiry leads to a hard inquiry.
How can I reduce the impact of a hard inquiry on my credit score?
Every time you make a hard inquiry, an inquiry will appear on your credit report. Applying for credit too frequently indicates to a lender that the applicant is desperate to obtain new credit, which indicates risk. Statistically, people with six inquiries or more on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports. This can take as much as 20 points off your credit score depending on type of hard inquiry and the time period in which the inquiry was done.
Under a law enacted in 2003, all credit pulls within a 30-day period for certain types of loans count as one pull. This is also known as rate shopping. Note however, that these do not apply to credit cards. Fair Isaac’s research has found that people that open several credit accounts within a short period of time represent greater credit risk.
When the information on your credit report indicates that you have been applying for multiple new credit lines in a short period of time (as opposed to rate shopping, for mortgage, auto and student loans), this will be damaging to your credit score.
FICO Scores ignore inquiries like these that are made within a 30 day-period. This is designed to allow people to shop around for the best deals without being penalized for doing so. So, to reduce the impact of hard inquiries, restrict your shopping around for these types of credit within a 30-day period.
How long does a hard inquiry remain on my account, and how long does it impact the account?
A hard inquiry will remain on your account for two years. It will also count against your FICO score for up to a year.
The Different Types of Credit
What is an instalment Account?
When you open an instalment account, you borrow a specific amount of money, and then make fixed payments on the account. When you take out the loan, you know exactly the amount of the payment and how many payments you’ll need to make to pay off the account. Common examples of instalment accounts include mortgage loans, home equity loans and car loans. A student loan is also an example of an instalment account. An instalment loan can be secured or unsecured. Paying instalment accounts on time as agreed progressively reduces the amount owed and shows responsible credit usage. This account will have an “I” next to it on your credit report.
How can I open an installment account?
The easiest way to open an installment account is to open up a $250 savings account with a credit union and then take a $250 installment loan, using the savings account as collateral. This is a no-risk transaction, so everyone is usually approved. Under this arrangement, you’ll make a $50 monthly payment for five months and then you’ll be entitled to receive back the $250 that you have deposited. To keep your credit history fresh, you can simply do this over and over again.
What is revolving credit?
Revolving credit is typically an unsecured line of credit (not backed by any collateral) that can be used up to the available credit limit. You can pay down the debt and then use it back up to the maximum limit again, as long as you pay the account as agreed. When you apply for a credit card, most of the time you’ll be getting an open or revolving credit account.
In simple terms, revolving credit means that once you’re approved and have been given a credit limit (the amount you’re allowed to borrow based on your credit score and history), then you’re free to make charges and payments at will as long as you stay within the preset credit limit. Each month you’ll be required to make a minimum payment that will include interest charges.
As you reduce your balance, you’ll have more of the funds available to use, up to your credit limit. As an example, if your credit limit is set at $2,500 and you charge purchases totalling $500, you’ll have $2,000 remaining for future purchases. If you then make a payment of $100 when the bill is due, you’ll have $2,100 in available credit to use.
What is the difference between instalment credit and revolving credit?
A revolving account allows you to borrow an amount up to a specific limit. For example, if you have a credit card with a $5,000 limit, you can borrow any amount up to $5,000. The payment amount on a revolving account varies depending on how much you borrow. As with an installment account, the balance decreases as you make payments. With an installment account however, the amount you pay back on a monthly basis is fixed. With a revolving account, you can choose to continue borrowing against the account as you make payments, and those payments will vary according to what you borrow.
Pay to Delete
What is Pay to Delete?
Pay to delete is a strategy designed to remove a negative item from your credit report through negotiation with the original creditor. Essentially, you agree to pay the creditor an agreed amount only if they agree to completely remove such items from your credit report.
How effective is the pay to delete strategy?
Pay to delete is not always effective. This is because by the time a negative item is marked as a charge off on your credit report, the account has already been closed for several months, and the debt has been handed over to a debt collections agency for action. This means you will now be dealing with the debt collections agency. However, the original creditor is the only one that can remove a negative item from your credit report.
The problem is, they would have charged off your account, and have gotten their tax and insurance claim benefit from the write off. You would therefore have to negotiate with the original creditor, rather than the debt collection agency to remove the charge off from your account.
If the debt has been reported by debt collection agency, paying for a deletion to either party will not remove both debts. In this case, you would have to negotiate removal of the debts with both the original creditor and the debt collection agency. There are even situations where the original creditor has sold the debt to multiple debt collection agencies. If this is the case, before making any payment you should question the validity of the debt by requesting a method of verification proof (mov) from the credit reporting agency.
The credit bureaus are required to provide the method of verification that includes the name, address, and telephone number of original creditor who reported the debt. Also, they must prove they received from the creditor a copy of the original dated contract with your signature on it.
Unused Credit Cards.
If I stop using my credit card for some time, will this improve my credit score?
It is important to use your credit cards because cards that are never used can cost you points. Scoring systems deduct points from consumers with no recent revolving balances reported on their credit, and dormant credit cards cost lenders money to maintain your account. FICO can’t even generate a score for a consumer without at least 6 months recent activity on an account.
Rather than leaving a card idle, charge just $10 on a card and pay it off before the statement is due. This counts as recent activity and will help increase your score.