A charge off happens when a creditor gives up on you paying the debt; this usually happens when you have missed several months of payments. They write it off as a loss, and close the account. At this point, they have not sold the debt to a collections agency, but they likely will in the future.
If a debt is charged off, that will show on your credit report. A charge off will lower your credit score.
If you can, it’s a good idea to pay off the debt before it is sold to collections. If the debt is sold to collections, it will create a new negative account on your credit report and lower your credit score further.
You can contact the creditor and try to negotiate. Sometimes they will take a lower amount than what is owed to settle the debt. If they settle for a lower amount, you will owe income tax on any amount that is forgiven from the original balance.
If you don’t have the money to pay the debt, it will likely be sold to a collections agency.
A charge off account cannot be used to build credit, because the account is closed. Monthly payments on a closed account will not improve your credit score. Your score may improve if you pay it off in full, and you can ask the creditor to agree to remove it from your credit report once it is paid in full. Be sure to get this in writing.
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To Do: If you have charge offs, contact the creditor and try to negotiate. You may be able to settle for less than the amount owed, if you have a lump sum payment available.
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Tip: Deal with charge offs as soon as you can, before the debt is sold to a collections agency.
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