What Is a Charge-Off on a Credit Card?
Understand what a credit card charge-off is, its significant impact on your credit, and effective strategies to address it.
A credit card charge-off is often misunderstood as debt forgiveness. Instead, it is an internal accounting declaration by a creditor, such as a credit card company, when they determine a debt is unlikely to be collected. This allows the creditor to remove the uncollectible amount from their active accounts and classify it as a loss. However, this action does not erase the consumer’s legal obligation to repay the debt. The debt remains valid, and the creditor or a third party can continue efforts to recover the outstanding balance.
The Path to a Charge-Off
The process leading to a credit card charge-off typically begins after extended delinquency. Creditors generally declare an account charged off once it becomes 180 days past due, meaning six months of missed minimum payments. While 180 days is the common benchmark, some creditors may charge off an account sooner, such as after 120 or 150 days, depending on internal policies. During this period, the creditor will engage in collection efforts, including sending notices, making phone calls, and attempting to reach an arrangement with the cardholder.
A charge-off is a bookkeeping decision for the creditor, signifying they no longer expect to collect the debt through routine billing and collection processes. This internal reclassification allows the creditor to report the debt as a loss on their financial statements. Even though the account is charged off and closed to future charges, the original creditor retains the right to collect the debt. This is an accounting measure, not an act of benevolence that absolves the borrower of financial responsibility.
Impact on Your Credit and Debt
A credit card charge-off has a negative impact on a consumer’s credit profile. Once an account is charged off, it is reported to the major credit bureaus, appearing as a derogatory mark on the credit report. This entry can cause a significant drop in credit scores, potentially by 50 to 150 points, making it difficult to obtain new credit, loans, or secure housing. The charge-off, along with preceding missed payments, can remain on a credit report for up to seven years from the date of the first missed payment that led to the delinquency.
Despite the charge-off, the debt remains legally owed by the consumer. The original creditor may continue collection efforts, or they might sell the charged-off debt to a third-party collection agency. If the debt is sold, it may appear twice on the credit report: once from the original creditor as a charge-off and again from the collection agency as a collection account, further impacting credit scores. Consumers should be aware that even after a charge-off, legal actions such as lawsuits or wage garnishment are possible, depending on the state’s statute of limitations for debt collection.
Addressing a Charged-Off Account
Upon learning of a charged-off account, a consumer has several options to address the debt and mitigate its long-term effects. The most straightforward approach is to pay the full outstanding balance directly to the original creditor or the collection agency if the debt has been sold. While paying in full will not immediately remove the charge-off from a credit report, it will update the status to “paid charge-off” or “settled in full,” which is viewed more favorably by future lenders than an unpaid account. This action can also prevent further collection efforts and potential legal action.
If paying the full amount is not feasible, negotiating a settlement for a lesser amount is often a viable alternative. Creditors or collection agencies may be willing to accept a lump-sum payment of 30% to 50% of the original balance, though this can vary. It is important to obtain any settlement agreement in writing before making a payment, ensuring all terms, including the agreed-upon amount and the agreement that the remaining balance is forgiven, are explicitly documented. Without written confirmation, the creditor could still pursue the full original balance.
Some consumers inquire about a “pay for delete” request, which involves asking the creditor or collector to remove the charge-off from the credit report in exchange for payment. While this is sometimes attempted, creditors are generally required to report accurate information, making “pay for delete” requests unlikely to be successful, especially with original creditors. However, a paid charge-off, even if not deleted, can still contribute to credit score improvement over time. Ultimately, addressing charged-off debt, whether through full payment or settlement, is a proactive step toward rebuilding financial health and demonstrating responsible financial behavior.