What Is a Credit Card Charge-Off & What Happens Next?

A credit card charge-off occurs when a creditor formally removes a debt from its active accounts. This accounting procedure happens after an extended period of non-payment, signifying that the creditor considers the debt unlikely to be collected. While a charge-off is an internal declaration of a loss for the creditor, it does not erase the consumer’s obligation to repay the money. This action has significant implications for a consumer’s financial standing and future access to credit.

Defining Credit Card Charge-Off

A credit card charge-off is an internal accounting adjustment a creditor makes when a consumer’s debt is deemed uncollectible. From the creditor’s perspective, this means the debt is removed from their active balance sheet as an asset and written off as a loss. This typically occurs after a credit card account has been delinquent for a substantial period, often around 180 days of missed payments. Despite being written off by the creditor, the consumer remains legally responsible for the full amount owed. This action is taken only after various attempts to collect the outstanding balance have been unsuccessful.

The Charge-Off Timeline and Creditor Actions

The path to a credit card charge-off begins with missed payments and escalating delinquency statuses. Initially, an account becomes delinquent after a single missed payment, typically around 30 days past due. As the delinquency progresses, the creditor’s collection efforts intensify, involving phone calls, letters, and the assessment of late fees. If payments continue to be missed, the account status moves through stages such as 60, 90, 120, and 150 days past due. A charge-off generally occurs when the account reaches approximately 180 days of non-payment, at which point the original creditor may close the account.

After a charge-off, the original creditor might continue their own internal collection efforts, or the debt may be sold to a third-party debt buyer. Alternatively, the debt could be transferred to a collection agency, which then attempts to collect on behalf of the original creditor. When a debt is sold or transferred, the consumer’s obligation shifts to the new entity, meaning future communications will come from the debt buyer or collection agency. The original creditor’s charge-off notation remains on the credit report, and a new collection account may also appear, complicating the credit profile.

Credit Score and Reporting Implications

A charge-off significantly impacts credit scores, primarily because payment history is a major factor in credit scoring models, accounting for 35% of a FICO Score. The negative effect on a score can be substantial, with the most significant drop often occurring with the initial missed payments that precede the charge-off.

A charge-off typically 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 entry generally stays on the report for this full seven-year period, though its status will update to reflect payment. The presence of a charged-off account can make it challenging to obtain new credit, such as loans, mortgages, or other credit cards, as lenders view it as an indicator of increased risk.

Strategies for Debt Resolution

One option is to pay the debt in full, which stops collection efforts and updates the account status on the credit report to “paid charge-off.” While the charge-off itself remains on the report for seven years, a paid status is often viewed more favorably by future lenders than an unpaid one.

Another strategy involves negotiating a settlement with the original creditor or the debt collector for an amount less than the full balance. This can significantly reduce the financial burden, with settlements sometimes ranging from 30% to 50% of the original debt. It is important to obtain any settlement agreement in writing before making a payment to ensure clear terms and to prevent future disputes.

Consumers also have the right to dispute inaccurate information related to a charge-off on their credit report. If an entry contains errors, such as an incorrect amount or if it is not truly their debt, they can formally dispute it with the credit bureaus. Providing supporting documentation can help validate the dispute, and if the information cannot be verified, it should be removed.