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Charge-off’s credit impact decreases with age

Erica Sandberg

September 6, 2016

QHi Erica,
My question involves charge-offs and apartment rentals. I’m looking to move to a new city next year, after 40 years of living in the same apartment in New York City. I’m currently retired and living on a pension and Social Security. About six years ago, I lost my main source of income. In a panic, I began living off my credit cards (big mistake).

Long story short, I was unable to pay back the money, and the credit card company charged off my debt. Since then, I’ve been slowly rebuilding my credit (750 and climbing) and pulling myself out of the financial gutter. Now I’m ready to move on. But what will my potential landlord think? In spite of my financial troubles, I’ve never missed a rent payment or a utility bill. My credit was excellent until I made that one stupid mistake. Thanks for listening. — Reginald

ADear Reginald,

I must say that your letter touched me. It can be incredibly difficult to admit fault. Overusing credit cards during a time of financial instability was a mistake, but it’s a common one.

Without enough income to meet essential expenses, it can be tempting to lean on your credit cards. The relief, though, is short-lived. Soon the credit card company statements arrive, and if you don’t have the cash to spare, it will send information about the delinquencies to the credit reporting agencies.

As months pass without payment, the damage to your credit rating deepens. After six months, your card issuer typically charges the account off (if it hasn’t sued you first), thus removing the debt from the issuer’s books. Not only is the charge-off notation on your credit reports, it is negatively factored into your credit scores.

However, your credit score now is excellent. Both the FICO and VantageScore range from 300 to 850. Your “750 and climbing” score is in the upper echelons! If someone were to look at your credit score alone, you would be considered an exceptionally low risk.

The reason your credit score has rebounded? Years have passed since the charge-off, and in that time you’ve taken strides to rectify the problem. Charge-offs do remain on a credit report for seven years, but the negative notation’s scoring impact is diluted with age.

Although that charge-off will be listed on your credit report for another year or so, most would-be creditors would not judge you harshly. The charge-off’s ding is practically ancient history, and soon it will vanish from your credit reports completely.

Just to be sure, though, I asked Eghan Rashidi, aka The Landlord Expert, about your situation. He also says not to worry.

“A credit score alone should not be the determining factor for approving a rental application, and one old charge-off — depending on its severity — should not deter a landlord from renting to a prospective tenant,” says Rashidi.

He notes that there are three steps to a thorough rental application: getting a landlord reference, verifying income and then running a credit check. So while the credit impact from your charge-off may be a consideration, a credit check is just one of the steps to landing a new apartment.

To ace the income verification step, the common equation is that a tenant’s gross monthly income typically should be at least three times the amount of the rent. For example, you’d need to have $4,500 in income for a place renting for $1,500 per month. But that $4,500 does not have to be from a job. Your Social Security benefits, pension and (if you have any) retirement plan distributions should all count, as long as it’s all verifiable.

Good luck Reginald, and please write back when you’re settled into your new home. I have a feeling getting approved for a new apartment will go far more smoothly than you fear.

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