Charge-Off Definition | Business Credit Glossary

Definition

An accounting action where a creditor writes off a delinquent debt as a loss after the borrower has been significantly past due, typically 120 to 180 days, with the debt remaining legally owed.

Explanation

A charge-off occurs when a creditor determines that a debt is unlikely to be collected and writes it off their books as a loss for accounting purposes. This typically happens when a borrower is 120 to 180 days past due on a credit card or installment loan. From the creditor's perspective, the charge-off clears the debt from their active receivables. From the borrower's perspective, it is a serious negative credit event — and importantly, it does not eliminate the legal obligation to repay the debt. Charge-offs appear on credit reports and remain there for seven years from the date of first delinquency (not the charge-off date). The charge-off notation is one of the more severe derogatory marks, typically causing 50 to 100+ point drops in FICO scores depending on the borrower's starting score and the size of the debt. A charged-off account shows the account status as "charged off" while any subsequent sale to a collection agency generates an additional, separate collection account entry. After a charge-off, the original creditor may continue attempting to collect, sell the debt to a collection agency, or both. The borrower may receive collection calls from the original creditor, from a collection agency, or from debt buyers who purchase charged-off debt portfolios. Paying a charged-off debt does not remove it from the credit report in most cases, but changes the status to "paid charge-off" which is viewed more favorably by lenders than an open unpaid charge-off.

Example

A business owner stops paying a business credit card with a $8,500 balance during a cash flow crisis. After 150 days of non-payment, the bank charges off the account. The charge-off appears on the owner's personal credit report (because the card was personally guaranteed), reducing their FICO by approximately 70 points. The bank sells the debt to a collection agency, creating a second negative entry. Both items appear for 7 years from the original default date.

Why It Matters

Charge-offs are among the most damaging credit events short of bankruptcy, and they remain on credit reports for seven years. Preventing a charge-off by communicating with creditors during financial stress — requesting hardship programs, negotiating payment plans, or settling before charge-off — is far better for credit health than allowing the account to reach charge-off status. Many creditors offer hardship arrangements specifically to avoid the loss associated with charge-offs.

Frequently asked questions

Should I pay a charged-off debt?

Paying a charged-off debt does not remove it from your credit report but changes its status from unpaid to paid. On newer FICO models (FICO 9+), a paid charge-off has no scoring impact; on older models still used by many lenders, it has less impact than an unpaid charge-off. Paying also resolves your legal obligation and eliminates potential lawsuits or judgments. If negotiating payment, request "pay for delete" — complete removal of the tradeline — as the best possible outcome, though creditors are not obligated to agree.