What Does It Mean When a Card Is Charged Off?

A credit card charge-off is a significant event in an individual’s financial standing. It is a term frequently encountered by those navigating challenging financial situations. Understanding the implications of a charge-off is essential for managing personal finances and credit health.

Understanding a Charged-Off Account

A “charge-off” occurs when a creditor determines that a debt is unlikely to be collected and removes it from their active accounts as an asset. This is an internal accounting adjustment, allowing the creditor to write off the debt for tax purposes. This action takes place after a period of prolonged non-payment, 120 to 180 days (four to six months) of missed minimum payments.

Despite the creditor writing off the debt, the consumer’s legal obligation to repay the debt remains. The charge-off means the account is closed to future charges and the original creditor ceases direct billing efforts. This does not mean the debt is forgiven or eliminated for the consumer, who is still responsible for the full amount owed, potentially including accrued interest and fees.

Implications for Credit

A charge-off carries negative consequences for an individual’s credit score and credit report. It is considered a major derogatory mark, indicating a serious default. This negative entry can significantly lower credit scores, potentially by 50 to 150 points, and the impact can be more pronounced for individuals who previously had good credit. Payment history is the most influential factor in credit scoring models.

A charged-off account remains on a credit report for up to seven years from the date of the first missed payment. Even if the debt is later paid or settled, the charge-off still appears, though its status updates to “paid” or “settled.” The presence of a charge-off can make it more difficult to obtain new credit, like credit cards, mortgages, or auto loans, and may result in higher interest rates if approved. It can also affect approvals for housing rentals and employment, as credit reports are sometimes reviewed.

What Happens After a Charge-Off

After a credit card account is charged off, the original creditor typically takes further steps to recover the outstanding balance. The creditor may continue internal collection efforts, sending communications to the consumer to demand payment. Often, the original creditor will sell the charged-off debt to a third-party debt collection agency for a fraction of the amount owed. The consumer then receives communications, such as phone calls and letters, from the new entity seeking repayment.

Debt collectors are bound by regulations like the Fair Debt Collection Practices Act (FDCPA), which governs their conduct. If collection efforts are unsuccessful, the creditor or debt purchaser may initiate legal action to recover the debt, within the state’s statute of limitations. If a lawsuit results in a judgment, the creditor or collector may pursue wage garnishment or bank account levies to satisfy the debt.

Addressing a Charged-Off Account

Individuals with a charged-off account have several options. One approach is to pay the full balance, which stops collection efforts and prevents additional interest or fees. While paying in full does not remove the charge-off from the credit report, it updates the account status to “paid,” viewed more favorably by lenders than an unpaid charge-off.

Another option is to negotiate a settlement with the creditor or debt collector for a lower amount. Debt collectors, having purchased the debt at a reduced price, may settle for less to recover their investment. Settling the debt updates the credit report status to “settled,” an improvement over an unpaid status, though still a derogatory mark. For overwhelming debt, bankruptcy can discharge qualifying charged-off debts and halt collection. Including charged-off accounts in bankruptcy filings is important for potential discharge.