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Difference between a charge-off and a collection

Monday April 08, 2019

Once a debtor has missed payments for several months, the creditor can either charge-off the debt or sell it to a collections agency. Either way, the debt is commonly reported to the credit bureau, which means it will affect your credit rating. Let’s go through each term in a little more detail, so you can understand what they mean and how they affect your credit.


A charge off is a debt that has gone into default when the debtor has missed several payments. After failing to retrieve this debt for some time, the creditor may decide that the debt is a loss and designate it as a charge-off. 

If the debt is charged off, the debtor is still responsible for paying back the debt. In fact, this charge-off can stay on your record for up to seven years.


Similarly, a debt that has gone into default can be sold to collection agency or debt collector. These accounts are known as "collections,” and can appear on your credit report. If this happens, your credit score is likely to drop significantly, and it may be difficult to apply for credit.  


Effect of charge-offs and collections on credit score

Both charge-offs and collections are derogatory marks on your record that occur after a number of missed payments. Naturally, missed payments affect your credit, because payment history determines your credit score. But your scores will decrease even further if the account is listed as a charge-off or a collection, as these derogatory entries show increased risk. As risk increases, your credit score decreases. In the case of collection, defaulting on payments to the collections agency could damage your credit even more, because the agency will likely report any missed payments to the credit bureaus.

Generally speaking, a charge off and a collection can be reflected on one account. This can occur when the debt defaults and is charged-off by the bank, and reported to the credit bureau. Then, the bank outsources the debt to a third-party collections agency, who also reports it to the credit bureau, leaving you with two negative accounts. Since the debtor now owes the collections agency, the agency will report the balance owed to the bureau, which will be higher due to interest and fees added. The date that the agency bought the debt will be reported as the open date, but the time the negative mark will be on your report comes from the original date of delinquency reported by the original creditor. Should you have a credit report with one collection and one charge-off reflected at different dates, the more recent the derogatory entry, the more damaging it is to your credit score.

Here’s some good news: If you can demonstrate that you use credit responsibly and are proactively making payments on time, then the affect of derogatory entries on your credit report will begin to diminish after two years instead of seven.

If you’d like to find out more about charge-offs and collections, or how to improve your credit rating, contact us today on 647.309.1803 to get the conversation started.  

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