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By Mark Lauer Updated on December 14, 2021

Charge-Offs: Here’s What They Are — and How to Avoid Them

Whether you’ve borrowed funds for your business via credit cards, a conventional loan, a Small Business Administration (SBA) loan or some other type of financing, failing to repay the funds can cause a lender to charge off the amount as bad debt.  We’ll explain what charge-offs are, how to avoid them and how to get them removed from your credit report.

What Is a Charge-Off?

A charge-off is a declaration issued to debtors when they’re late on paying debt, such as credit cards or loan repayments.  The lender presumes the debt will remain unpaid, so the income is removed from the ledger. The debt is documented in the lender’s organization as “bad debt” or “charged-off.” It also can be referred to as being “written-off.” A charge-off is usually applied to the borrower’s account after 6 months of failing to repay the borrowed amount. It signifies the account is inactive due to nonpayment. Make no mistake: An account that’s charged off as bad debt could have a sharply negative impact on one’s credit rating.

  • Charge-Off Debt vs. Transferred Debt

    While charge-off debt is documented as “bad debt” within the lender’s own organization, transferred debt is when a lender sells that debt to a collection agency.  The debt is essentially shifted over to the debt-collection service and the transfer will be noted on your credit report from the original lender. The agency that purchases your debt will then be marked as the active entry for the outstanding balance. It’s crucial to note transferred doesn’t always imply that an account was left unpaid and sold to a debt collection agency. If you closed your account or it was sold while still in good standing, then your credit report could still show “transferred.”

How Do Loan Charge-Offs Affect My Credit Score?

After being issued a charge-off for an unpaid account balance, you’ll receive negative reports for each of the delinquent accounts, causing your credit score to take a hit. The extent of your credit score’s damage will depend on  which credit bureau updates your report and how high your score is at the time the charge-off is issued.

How Long Do Charge-Offs Stay on a Credit Report? 

A charge-off may remain on a credit report for 7 years from the date it was issued. Note that paying off the entire balance of your debt won’t remove the charge-off. However, it will reflect positively for a borrower when applying for credit further down the line with future lenders.

What Does a Charge-Off Mean on a Credit Report?

The most detrimental impact of a charge-off will be the effect it has on your ability to secure future financing in the form of a small business loan or a business credit card. Lenders use your credit score to evaluate your ability to repay the money based on various factors, including your payment history, the number of lenders you have credit with and the amounts borrowed. To lenders, long credit histories and a high credit score indicate you’re able to stick to the terms of your financing agreement and repay any money you borrow. A lower credit score is often viewed by lenders as high risk, making it more difficult for you to obtain credit. The repercussions of a poor credit score mean your loan application might be denied or you may be offered lower amounts or a higher interest rate.

Illustration of one person giving the thumbs up and another person giving the thumbs down.

How to Avoid a Charge-Off

There are a few things you can do to avoid getting a charge-off notice on your credit report. If you already have a charge-off on your report, there are actions you can take to diminish its impact.

Pay Down Your Debts as Soon as Possible

Chipping away at your debts on time, every time is an efficient way to improve your credit score and maintain its health in the long-term. It’s good practice to set up automatic payments to avoid missing a remittance on any credit that you’ve borrowed. If you’ve already been issued a charge-off, consistently paying down the debt every month will help you clear your debt obligation. 

Communicate With the Lender

Falling behind on payments can make a person feel embarrassed or ashamed. However, lenders are often more understanding than you’d think.  It’s beneficial for the lender to get you back on your feet, as opposed to completely writing off your debt. Directly contacting them to discuss your options could result in negotiating a lower minimum payment or extending the life of your loan.


It can be overwhelming to keep track of multiple loans and credit cards while trying to manage balances and repayments. Consolidating your debt into one loan can help.  Consider closing credit-card accounts or transferring the balance onto another card with lower interest rates. 

Control Yourself

Limiting credit utilization can benefit your business and your personal finances. Before you max out the credit that’s available to you, ask yourself if you have the cash reserves or a future guarantee of income that will meet your debt obligations.

Revise Your Budget

Reviewing your budget and looking for expenses you can cut is a beneficial business practice—whether you need to cut back on travel expenses, utility costs or finding a supplier that can provide products at a cheaper rate.  Getting a clear picture of your spending, and evaluating how you can improve it, can help you avoid debt and a charge-off. 

How to Remove a Charge-Off

If you feel the unpaid debt is incorrect, you should contact the lender or file a dispute with the reporting credit bureau.   While there aren’t many options to remove a legitimate charge-off from a credit report, you can reach out to the original debt-holder and offer to pay off the debt in full in exchange for the deletion of the charge-off note. It’s recommended to get the agreement in writing before making the payment. If the lender declines your offer, you likely will have to wait 7 years for the charge-off to be expunged from your credit report. If you have been issued with a charge-off, it’s best to focus on how you can improve your financial situation for the future. Communicate with your lender and use the tips provided above to get yourself back on track.

Mark Lauer has been a Business Advisor at Fast Capital 360 since the very beginning. He’s helped thousands of businesses reach their potential, grow and thrive, forging strong relationships along the way.
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