Old debt can come back to haunt you, even several years down the road. If it has been a long time since you have made a payment and the credit card company has done everything possible to obtain the payment from you, they may charge the debt off. This does not mean that the amount no longer reports on your credit report; it actually reports as a charge-off, which is much worse than having any other type of debt on your credit report.
What is a Charge-Off?
A charge-off is a debt that was never repaid and the lender has lost all hope in recouping the money from you. This typically occurs once the debt has not been paid for six consecutive months. This does not mean that you are off the hook though; you still need to pay the debt. It will remain on your credit report for the next 7 years and negatively affect your ability to obtain new credit.
What is a Settlement?
Sometimes when a debt is outstanding long enough, the creditor is willing to take a settlement offer from you. This means that you pay less than the full amount of the debt, but the creditor considers the account paid. On the credit report, however, it will show that you paid less than the full amount of the debt back. This statement will remain on your credit report for 7 years from the day that you pay the debt back and will reflect negatively to lenders.
How is a Mortgage Application Affected?
Mortgage lenders will look at every aspect of your credit report; not just your credit score. This means that if you have accounts that were charged off or settled, the lender will know about it. If it was a one-time deal and you can explain why it happened, you might be able to get approved for a mortgage. If you have several accounts that were charged off or settled for less than the full amount, the lender will take it into consideration for your future financial abilities and think twice before lending to you. There is no way to determine what a lender will do with any charged off or settled account, but chances are it will negatively affect your application.
Deciding Between a Settlement and Charge-off
If you have to make the decision between taking a settlement and allowing the account to be charged off, you need to consider your circumstances. If you never plan on paying the account in full, a settlement will at least show that you made an effort to satisfy the account, but it will also show that you default on your obligations, making the mortgage lender less likely to lend to you. If you know that you will have the money in the future to pay the debt, it could be best to let it charge-off and then pay the debt when you are able. While this will still show up on your credit report, it will show that you satisfied the debt, regardless of the fact that it was late. If there is a valid reason for the lack of ability to pay the debt in the first place, it might be forgiven by the lender.
It is best to do whatever you can to ensure that you do not have a charge-off or settlement on your credit report, but life is not always perfect. If you do end up in this situation, it is best to pay the debt off in full as soon as you can and to avoid having any future charge-offs or settlements. As long as you avoid having a pattern of defaulted credit and you have a solid Letter of Explanation, describing the reason for the one-time default, a lender is likely to overlook the mistake and provide you with a second chance for the future.Click to See the Latest Mortgage Rates»