How an Auto Loan Charge-Off Affects Your Credit

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Automotive Editor

John Diether has been a professional writer, editor, and producer since 1997. His work can be found on TV, radio, web, and various publications throughout the world.  He is a graduate of Northwestern University and has a 1992 Cadillac Brougham d’Elegance in his garage. 


, Automotive Editor - May 23, 2016

A loan charge-off can stay on your credit report for years, making it difficult to get approved for most types of financing. While the impact on your score decreases over time, some lenders will automatically turn down borrowers with a single charge-off in their history.

What is a charge-off?

When a borrower is far behind on a debt (usually 6 months), the lender can issue a charge-off. This is a declaration that attempts to collect from the borrower have failed and the loan isn't likely to be repaid. A charge-off doesn't always mean the lender has given up on collecting, but most do at this point. The debt is usually sold to a collection agency, which then pursues payment.

Impact on creditworthiness

A charge-off severely damages a borrower's ability to obtain credit and can remain on a credit report for up to seven years. Borrowers with high credit scores have the most to lose and can wind up with bad credit virtually overnight. If the lender has sold the debt, it will remain "active" on the report as being owed to the collection agency. In other words, the borrower is still responsible for the debt, even though the original lender has deemed it uncollectible.

As time goes by, the effect on the borrower's score will lessen, although there might not be appreciable improvement for the first three years. Creditworthiness won't be fully restored until the charge-off no longer shows on the report.

Avoiding charge-offs

Charge-offs occur when accounts are severely delinquent. Before hitting this point of no return, borrowers should discuss the situation with their lender. Temporary relief could include revising the payment schedule, lowering the interest rate, or temporarily suspending payments. Whatever options are available, it's critical for the borrower to show willingness to repay the debt. A lender isn't likely to charge off an account when the borrower is cooperative and seeking solutions.

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, Automotive Editor

John Diether has been a professional writer, editor, and producer since 1997. His work can be found on TV, radio, web, and various publications throughout the world.  He is a graduate of Northwestern University and has a 1992 Cadillac Brougham d’Elegance in his garage. 


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