Identification

• When you do not make a payment on a credit card with a balance for six months, creditors typically charge off the debt, meaning that they have lost all hope of ever getting their money. Accountants require creditors do this; otherwise, it would appear that your account is an asset. Once your creditor charges off your account, it is no longer an asset on the creditor's books. Creditors chalk this up as a loss and report to the credit-reporting agencies that they charged off your account. This remains on your credit record for seven years.
  
  

Misconceptions

• Just because your credit card issuer charges off your account, doesn't mean you don't still owe on it. Your original creditor can still try to collect on the debt using an in-house program or by using a debt collection agency. The collections department may request full payment or may settle with you for less than what you owe.
  
  

Significance

• If you pay off the debt to the debt collector, the charge-off remains on your credit report. Your report will be updated to read, "paid charge-off," which may open the door for you to get a future loan, such as a mortgage, according to Bankrate.com. Some lenders will loan to you if you have a paid charge-off but won't if you have an outstanding charge-off.
  
  

Potential

• Once you pay off your charge-off, wait 60 days and then request a copy of your credit report with the three credit-reporting agencies -- Experian, Equifax and TransUnion. You can get a free copy of your report once every 12 months through AnnualCreditReport.com. If your account is not listed as "paid charge-off" or "paid in full," contact the credit reporting agencies. Provide proof that you paid off the account, and ask that your account be updated to reflect the change.
  
  

Warning

• If you are contacted by a debt collector, ask for verification that the debt is yours, recommends Bankrate.com. Before you make any payments to the debt collector, have the collector send you the terms of your agreement in writing. If you ignore the debt collector, the debt collector could sue you, win a judgment against you and garnish your wages.