What is a Credit Card Charge-Off?

credit card charge off

Having delinquent debt is never a good thing. If you miss your credit card payments for long enough, you may find yourself facing low credit scores and merciless debt collectors. But if you fall even further behind, the issuing institution may perform a credit card charge-off instead of taking you to court. 

How does a credit card charge-off work?

A credit card charge-off happens when you go from 120 to 180 days without making the minimum monthly payment on your credit card. At this point, the creditor can write off your account as “uncollectible” for tax purposes and close down your credit card.

Unfortunately, a credit card charge-off does not mean that you’re absolved of paying your credit cards. Instead, it means that the company has written off your previous good debt as bad debt.

What happens when your credit card is charged off?

When your credit card is charged off, the creditor considers your account uncollectible for accounting purposes. While you still legally owe the debt, the lender may sell your debt or hire a collection agency to do the heavy lifting. 

Credit charge-offs have huge implications for your future borrowing endeavors. Many creditors won’t approve your future applications for credit cards, mortgages, or auto loans. 

Do you have to pay a charged-off credit card?

Yes. Just because your credit card is charged-off doesn’t mean that you don’t have to pay your balance, including your late fees.

In fact, the lender or collection agency is still legally entitled to pursue you for the debt until the state-mandated statute of limitations expires. And if you refuse to pay your debt, the creditor may sue you to recoup their losses. 

How do I remove charge-offs from my credit?

It’s rare for a creditor or credit bureau to remove a charge-off from your credit report, but you can still try. The best way to approach this situation is to deal with the original creditor, even if they’ve sold your debt. 

Call or visit the creditor and ask to speak with someone who has the authority to remove the charge-off. Let them know how much you can pay on your account today, and offer to negotiate a repayment plan in return for removing the charge-off from your credit report. 

You can also send a pay for delete letter to a higher-up figure in the management chain. This letter will ask the creditor to remove the entire account from your credit report if you pay it off in full. 

Keep in mind that this isn’t a guaranteed way to fix your credit score. Some lenders may be willing to negotiate–especially if you have extenuating circumstances, like a hospital stay. However, since lenders are required to report accurate information to the bureaus, a pay-for-delete letter might not work in your favor. 

How much does a charge-off affect your credit score?

By the time you receive a charge-off, your credit score has probably already taken a hit due to missed payments. But when the creditor writes off your debt as uncollectable, this puts another black mark on your credit report. 

A charge-off usually stays for seven years after the first missed payment, even if you pay down the debt later. If you do pay your debt, the credit bureaus will reflect this as a paid charge-off, which may be viewed more favorably by later lenders.

Charge off vs settlement

A “settled” status usually involves paying less than the full amount of your debt in exchange for a pause in the collection phone calls. While this is one way to close out your indebted accounts, your credit report will also reflect that you settled several years after the original delinquency date. 

As a rule of thumb, paying your debts in full is better for your credit than settling. When you pay in full, your credit report will reflect that you fulfilled your obligations–even if you were late. This looks better to future lenders than negotiating your debt. 

How to pay charged off credit cards

Paying your charged-off credit cards may take some time. But doing so will make creditors view you in a better light the next time you apply for a credit card. 

Negotiate repayment with the original lender

If the original lender hasn’t sold off your debt yet, you may be able to come to a new payment arrangement. Of course, you’ll still want to pay off the debt as quickly as possible. Once you’ve paid off your debt, the lender will report a “paid charge-off” status to the credit bureaus and update your balance to reflect your payment. 

Settle your debt

While settling your debt is not ideal, it’s still better than dealing with incessant phone calls and an unpaid charge-off. But keep in mind that your credit report will reflect a “settled” charge-off. 

Pay the collections agency

The third option when paying your charged-off account is to deal with the collections agency if your account has been sold. First, make sure that the collections agency in question is not a scam. You can do so by looking up the agency and requesting a letter of written proof that their claim is legitimate. 

Then, you should work with the agency to pay off your debts either in full or via a repayment plan. After your account is settled, your credit report should reflect a “paid collection,” which is still more favorable than an unpaid charge-off. 

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Acquiring a charge-off can be damaging for years to come, especially when it comes to taking on new debt. A charge-off has major implications for the future, especially when taking out new credit cards, buying a house, or getting a new car. 

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