What Does It Mean When a Credit Card Is Charged Off?

A credit card charge-off represents a significant event in the lifecycle of an unpaid debt. It occurs when a creditor formally classifies an outstanding balance as a loss on their financial records. This accounting action indicates the issuer considers the debt unlikely to be collected through normal means.

What a Credit Card Charge-Off Means

A credit card charge-off is an internal accounting declaration by a creditor that a debt is deemed uncollectible. This typically happens after a prolonged period of non-payment, often around 180 days past the due date. The creditor removes the debt from their active accounts receivable, categorizing it as a loss for tax and accounting purposes. A charge-off does not mean the debt is forgiven or erased; the consumer still legally owes the full amount. This accounting adjustment simply shifts the debt’s status on the creditor’s balance sheet from an asset to a loss.

How a Charge-Off Impacts Your Credit

A charged-off account is a severely negative entry on an individual’s credit report. It appears as a derogatory mark, signaling to potential lenders a high risk of default. This classification significantly lowers credit scores, as payment history is a major factor in credit scoring models, accounting for about 35% of a FICO score.

A charge-off remains on a credit report for up to seven years from the date of the first missed payment that led to the delinquency. Even if the debt is later paid, the charge-off record will persist, though its status may be updated. The presence of a charge-off can make it difficult to obtain new credit, secure loans, or affect housing and employment opportunities.

Creditor Actions After a Charge-Off

After an account is charged off, the original creditor may continue internal collection efforts. It is common for the original creditor to sell the charged-off debt to a third-party debt buyer. These debt buyers acquire the debt for a fraction of its original value and assume the right to pursue collection from the consumer. The debt buyer or the original creditor may also initiate legal action to recover the debt. This can involve filing a lawsuit to obtain a judgment, which could lead to wage garnishment or bank levies, depending on state laws.

Addressing a Charged-Off Account

Even after an account has been charged off, the debt remains owed and can be addressed. One option is to pay the full outstanding balance, which stops collection efforts and updates the credit report to reflect a zero balance. While the charge-off itself remains on the credit report, a paid status can appear more favorably to future lenders.

Another approach is to negotiate a settlement with the original creditor or the debt buyer for a lesser amount than the full balance. Many creditors are willing to accept a percentage of the debt, often between 30% and 50%, especially if offered as a lump sum. Any settlement agreement should be obtained in writing before making a payment to ensure the terms are clear and legally binding.

Regularly checking credit reports from all three major bureaus is important to ensure the accuracy of the charge-off entry and any subsequent updates. If errors are found, they can be disputed with the credit bureaus. For personalized guidance, consulting with a non-profit credit counseling agency can provide valuable support.