What Is a Charge-Off on a Credit Card?

When a credit card account reaches a point where the debt is considered uncollectible by the lender, it undergoes a process known as a charge-off. This action marks a critical juncture in the lifecycle of a credit account, signaling that the creditor no longer expects to recover the outstanding balance through regular payments. While it represents a final step for the creditor’s internal accounting, it initiates a new phase for the consumer regarding their financial obligations and credit standing.

What is a Credit Card Charge-Off

A credit card charge-off is an internal accounting procedure where a creditor formally declares an outstanding debt as a loss on their financial records. The creditor removes the debt from its active accounts and treats it as an uncollectible asset. This allows the creditor to write off the debt, which can provide a tax deduction for bad debts under Internal Revenue Code Section 166. Despite the creditor writing off the debt, the consumer’s legal obligation to repay the debt remains. The charge-off does not mean the debt is forgiven or erased; it signifies that the creditor has ceased expecting payment through the original terms of the credit agreement.

The Path to a Charge-Off

A credit card charge-off begins with a series of missed payments, gradually escalating the account’s delinquency status. After a consumer misses a payment, the account may be reported as 30, 60, 90, and 120 days past due if payments continue to be missed. During this period, the creditor sends notices and warnings. A credit card account is commonly charged off after approximately 180 days, or six months, of continuous non-payment. By this time, the creditor has generally exhausted its standard collection efforts and deems the likelihood of recovering the debt to be very low.

Consequences for the Consumer

A credit card charge-off carries negative consequences for the consumer, primarily impacting their credit report and financial standing. Once an account is charged off, it appears as a derogatory mark on the credit report, severely impacting credit scores as payment history is a primary factor. A charge-off remains on a consumer’s credit report for up to seven years, with this period beginning from the date of the first missed payment that led to the delinquency, not the actual charge-off date. The consumer’s legal obligation to repay the debt persists. The original creditor may continue collection efforts or sell the charged-off debt to a third-party debt buyer or collection agency.

Resolution of Charged-Off Debt

While a charge-off remains on a consumer’s credit report for up to seven years, its status can be updated if the debt is addressed. If the consumer pays the full amount or settles the debt for a reduced sum, the credit report will reflect this resolution, changing the account status to “paid,” “settled,” or “paid in full for less than the full balance.” An updated status, such as “paid charge-off,” does not remove the charge-off from the credit report. However, a paid or settled charge-off is viewed more favorably by prospective creditors than an unpaid one. This indicates that the consumer has fulfilled their obligation, which can be a positive signal for future creditworthiness.