Can I clear charged-off debt from my credit reports?

Opening Credits columnist Eric Sandberg
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.

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Question Dear Opening Credits,
How do I deal with an old, charged-off debt that is still listing a current balance every month on credit reports and thus affecting my credit utilization? I already was issued and sent in a 1099-C form on the forgiven debt some years ago and it’s past the state statute of limitations. – Iani

Answer

Dear Iani,
In your case, dealing with the charged-off account will most likely entail a combination of waiting and using current forms of credit positively. A charged-off debt will affect your credit utilization ratio (the percentage of your available credit that you’ve used) the same way any closed credit card with a balance does. If it shows up on your credit reports with an amount owed and a credit limit, it will be calculated in. The account will be excluded only when the debt is at $0 or it’s no longer listed on your reports.

Credit reporting agencies, such as TransUnion, Experian and Equifax, must abide by the rules outlined in the federal Fair Credit Reporting Act (FCRA). Accuracy and fairness is key. So, when looking at your reports and seeing negative line items, you have to ask yourself the following two questions:

1. Did it happen?

Not wanting unflattering data to appear on your report is natural, but it’s not enough to have it removed from your file. In fact, credit reporting agencies are obligated to list all accurate credit and debt activity sent to them by furnishers (such as credit card companies and collection agencies). Businesses pull these reports to gain a true understanding of a person’s credit history, so both the good and the bad are relevant.

From what you’ve written, it doesn’t sound like you’re disputing the fact that you let the account go so delinquent that the creditor finally charged it off. Just because the creditor can’t collect on the debt anymore (which prompted the IRS 1099-C form, indicating a forgiven balance that had to be counted as income on your tax return) doesn’t purge its historical significance. You had a debt you did not satisfy.

2. Is it too old?

The statute of limitations refers to the length of time a creditor has to sue a person for a debt, not how long negative data can be reported on your credit file. For example, in Washington, D.C., a creditor can instigate a lawsuit for a debt within three years, but in West Virginia, it would have 10 years to do so. If the statute of limitations has run out, you’re not in danger of being sued. That’s great news for you!

How long information stays on a credit report, however, is set by the FCRA. “Delinquencies remain on the credit report for seven years, so the account will show the late payment and charge-off history for seven years from the original delinquency date,” says Rod Griffin, director of public education at Experian. “The original delinquency date is the date of the first missed payment that led up to the charge-off status.”

So count forward from that date. If the account in question is more than seven years old, file a dispute with one of the credit reporting agencies and it will notify the other two. It’s hard to argue with dates, so the account will probably be removed without incident. If it’s still within that seven-year mark, exercise patience. Eventually it will age away.

Until the account ages off your credit report, make the most of this time by adding positive information to your credit files. Charge with any credit cards you have, but be diligent about paying on time and keeping balances low or to zero. If you have car, home or student loans, honor the due dates. Each month those issuers and lenders will send your activity to the credit reporting agencies. Collectively it will show that, despite the glitch that happened long ago, you can be trusted now – and on into the future.

See related: Paid a charged-off debt: Now what?, Minimizing score damage after a charge-off

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Updated: 01-21-2018