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.
A credit card charge-off is when a creditor or lender writes off an account as a loss, canceling any further charges. It’s important to note, however, that you are still expected to pay the debt, and the debt can still be sold to a collection agency. You also risk consequences such as hits to your credit score.
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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 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 causes a credit card charge-off?
Here are some of the factors that can lead to a credit card charge-off.
Failure to make payments
What is a credit card charge-off’s primary cause? Usually, it’s due to a failure to make payments on outstanding debt. If you haven’t met the minimum monthly payment for 30 days, your account will be considered “delinquent.”
Delinquency period
Credit card delinquency happens when you fail to make the minimum payment at the scheduled date.
Credit card companies will give you some leeway for a certain period, typically 30 days. They’ll notify you that you’re at risk of delinquency and give you until the next scheduled payment to catch up. If you fail to do so or miss two consecutive payments, your delinquency will be reported to the credit bureaus.
Even if you can’t make all the catch-up payments, making just one minimum payment can freeze the delinquency period. It doesn’t go away entirely (you still have to catch up on missing debt payments), but it can keep the card company from moving forward with a charge-off.
Lack of communication with the credit card issuer
Once you become aware of your delinquency, the best thing to do is contact the credit card issuer. Many card companies would rather work with you while you get back on track making your debt payments than write the debt off and send you to a collection agency or debt collector.
Life happens, and sometimes people forget or miss payments. Communicating with the card company is a good way to let them know it wasn’t intentional.
If the card company doesn’t hear from you, the assumption will be that the debt has gone bad, and they’ll move forward with a charge-off.
What happens when your credit card is charged off?
A credit card charge-off has consequences. Here’s what you can expect if you fail to pay your balance.
A negative impact on your credit score
When a creditor decides that a delinquency has reached the point of a charge-off, they’ll report the negative activity to the credit bureaus.
Payment history makes up 35% of your total credit score calculation, so having delinquency or default reported can significantly impact your credit score. And it will linger as a blemish on your credit report for the next seven years.
Difficulty obtaining credit in the future
When you apply for a loan or a credit card, the lender checks your credit history to evaluate how risky it would be to extend credit to you. A charge-off indicates that you were delinquent on paying back outstanding debt to the point that the lender gave up on ever getting back what they gave you.
When combined with the negative impact on your credit score, this situation can impair your ability to obtain credit until the charge-off is removed from your credit report.
Potential legal actions by the credit card issuer
Credit card companies tend to pursue delinquent payments. They’ll likely submit your debt to a collections agency after 90 days. After 180 days, the FDIC requires the credit card company to submit your debt for a charge-off. However, if you owe enough money, a lender may feel the need to take legal action.
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.
Tips for avoiding credit card charge-offs
Avoiding delinquency and a consequent charge-off is in your best interests. Here are a few tips for how to do it.
Create a budget and manage your finances effectively
A solid budget will let you see where your money is going every month and help you make sure you aren’t missing any payments. It can also give you advance warning that you might, allowing you to contact your credit card company prior to potential delinquency.
Communicate with the credit card issuer in case of financial difficulties
As mentioned, most credit card companies will work with you to help you avoid delinquency or charge-offs. Contacting them early on is a smart call if you anticipate trouble making payments. They may be willing to negotiate, lower your payments, or enroll you in a hardship program.
Make regular payments and stay up to date with your card balance
Making your regularly scheduled payments fully and on time is the best way to avoid problems. Not only does making timely payments keep you in good standing with the card company, but because your credit score is so heavily influenced by your payment history, it could also translate into an excellent credit rating over time.
Don’t Let a Credit Card Charge-Off Affect Your Future
Missing debt payments can lead to delinquency. If you’re delinquent long enough, your debt will be charged off. Neither of these are good outcomes for your credit history, credit score, and ability to borrow in the future. Steering clear of them all together is the best course.
FAQs
Do I have to pay a charged-off credit card?
When a lender or creditor writes an account off as a loss, it’s summarily closed. However, you’re still legally obligated to pay the debt, and you may be pursued by a collections agency or potentially face legal action.
What’s the difference between a charge-off and a settlement?
A charge-off is when your account is written off as uncollectible, while a settlement is a negotiated payoff of a portion of the debt. Both outcomes end up on your credit report, but lenders tend to look more favorably at settlements.
How do I remove a charge-off from my credit card?
You could remove a charge-off from your credit card by negotiating payment with the card company or demonstrating that the charge-off was filed based on incorrect information.
