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Creditors charge off, or write off, a debt when they believe a debt to be noncollectable. Usually, lenders try to collect on a debt for six months, or 180 days. After that, they list the debt as a loss in their accounting books for investors and tax officials. Some credit rating agencies, such as Equifax, use the code R9 for a charge off.
Effect of a Charge Off
The IRS typically gives a company a tax deduction when a debtor stiffs them on a bill, but the borrower still owes the money for as long as the lender can legally try to collect it. Also, the lender reports the account as a charge off to the credit bureaus. Once a charge off hits a credit report, it can destroy a credit rating. How many points a score loses depends on the rating before the charge off -- higher scores
lose more points.
Should You Pay The Debt?
You won't improve your score at all paying a credit card charge off; doing so just changes the status to "paid." A paid charge off, however, makes a borrower more trustworthy to creditors than a charge off that is ignored, especially when the debt involves thousands of dollars. Some banks may require all credit applicants to settle any old debts before they review the application.
The credit card company might report the charge off as an error if you agree to pay the bill in full, suggests Financial Web. This won't happen automatically, so do not send in any payment -- you completely lose your leverage if you do. You could try to negotiate a deletion of the charge off from your credit report for a partial payment, but the lender is far less likely to accept this provision than if you pay in full.