A troubling series of lawsuits has been filed in several states, improperly accusing lenders and the three national credit reporting companies (CRCs—Equifax, Experian and TransUnion) of mishandling the way they report credit card charge-off events on consumer credit reports.
More specifically, the suits allege—erroneously—that lenders and the CRCs are improperly treating a single charge-off as an event that recurs month after month after month, lowering the consumer’s credit score each time the event appears on the credit file.
To understand the mistaken assumptions behind these unfounded lawsuits, a bit of background is in order, starting with an explanation of what a charge-off is in the first place. A lender performs a charge-off when a consumer has defaulted on a debt, and the lender determines it will never be able to collect that debt. The lender reports the charge-off to the CRCs, who add it to the consumer’s credit files.
The relevant account in the consumer credit file is then assigned a charged-off status, and that status is applied to each monthly entry for that account, dating back to the month that the account first went delinquent. The date of the original delinquency is known as the anchor date for the charge-off. Charge-offs remain on consumer credit files for seven years from the anchor date.
The process described here represents accurate credit reporting, and complies with standards set forth by the credit reporting industry’s trade association, the Consumer Data Industry Association. One source of confusion surrounding the process may involve the fact that an interval of several months typically passes from the time when an account goes delinquent, to the date when the lender decides to write the account off and report the write-off to the CRCs. If the consumer obtains a credit report during that interval, the account status for the delinquency month, and any intervening months, will be listed as delinquent. Credit reports pulled after the charge-off is final will show the account status for those months as charged-off instead of delinquent.
The lawsuits allege that reporting the account status as charged-off for multiple months somehow indicates that the account was subjected to a brand new charge-off for each of those months, and that each monthly status triggers a new anchor date, which resets the seven-year clock that determines when the charge-off will be removed from the credit file.
That is categorically not the case. A charge-off is a single event which an account can only be subjected to once. Accounts cannot go into and out of charged-off status and the anchor date does not vary once it is set. Credit scoring systems, including VantageScore models, are designed to recognize the industry-standard methods for reporting charge-offs, and the models do not handle a series of charge-off statuses for a single account as multiple events.
A charge-off in a credit file is a significant negative event. It causes significant reductions in credit scores. Like all negative events in a credit file, its impact on a credit score diminishes over time. When calculating a score using a credit file that contains a charge-off, scoring models use the anchor date to properly age the defaulted account.