What Does a Charge-Off Mean? Effect on Credit Score and How to Remove
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When a lender marks 'charge-off' status for a borrower, they anticipate next-to-zero chances of gathering back their amount. Both individuals and corporate organisations may gain this reputation if they remain delinquent for a certain period.
Let’s understand how this charge-off status can affect one's credit score.
Understand How a Charge-Off Works
Any creditor may identify a borrower's unsettled account as a 'charge-off' when they believe the concerned entity will be unable to pay off the outstanding amount. It’s worth keeping in mind that even with this status, the concerned person or company will still be legally liable to repay their debt.
Financial experts always advise individuals to avoid ‘charge-off’ markings in their credit reports. This is because later on, when the consumer settles the overdue, the credit information companies won't remove the charge-off status from the report. As one may expect, ‘charge-off’ can have a massive impact on aecb credit scores and histories.
In UAE, credit accounts marked as charged-off cannot be removed from the blacklist for usually 10 years from the day of default.
How Does a Charge-Off Affect Credit Score?
Charge-offs, as mentioned earlier, can cause immense damage to your credit history. This is because the most significant factor in the calculation of your credit score in the UAE is payment history, making up to 35% of your score. With a charge-off indicating failure in repaying a particular debt, you can expect a significant negative impact on your credit history.
How to Remove Charged-Off Debt?
To avoid the adverse effects of a charge-off, you can first talk to the concerned bank about how you can settle the outstanding amount and whether it will still be considered a charge-off. You can certainly negotiate with the bank or lending institution and request a reduction in the outstanding amount, although the final decision will depend on the bank.
Generally, it is advisable to try to settle the outstanding amount in full (along with the lender’s stated penalties or charges) to stand a better chance of having the charge-off cleared. Keep in mind that even if you are able to settle the amount in its entirety, you will first need to discuss with your bank whether it agrees in writing to clear the charge-off status.
Another point to keep in mind is that some people might try to get debt consolidation loans or credit cards to settle the outstanding amount. However, considering the ‘charge-off’ status in their reports, it can be difficult to obtain new credit, even if it is for the settlement.
What If the Charge-Off Has Been Wrongly Initiated?
A few cases have been recorded where the charge-off was initiated due to an error. For this reason, it is always advisable to periodically go through one’s credit report as it can help individuals spot and report such errors promptly.
Listed below are some common errors which may lead to such cases -
- Wrong borrower name
- Incorrect account number
- Series of settlements accidentally omitted due to error posting
On observing any of these issues, you should Immediately contact the credit bureau. If the sightings appear to be genuine, the lender would have to present a valid justification to the credit information provider within 30 days.
Wrapping Up
Charge-offs present a big negative mark on one's credit history. For this reason, understanding the precautionary measures and consequences of being marked as a holder of a charged-off account is necessary.
In case one's debt gets marked as 'charged-off', they will be liable to pay back the entire due amount. However, simply making the repayment in full doesn’t guarantee the removal of a charge-off from one’s credit report. Before making the payment, thus, it is advisable to discuss the feasibility of removal of the charge-off from one’s report on the condition of clearing the outstanding amount along with applicable charges and penalties.
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