When Does a Credit Card Account Get Charged Off?
Gain clarity on credit card charge-offs: understand when they occur, their extensive financial consequences, and how to manage the situation effectively.
Credit card debt can become a significant financial burden, and for those facing difficulties with repayment, understanding the term “charge-off” becomes important. This accounting action by a credit card issuer marks an outstanding debt as unlikely to be collected.
Understanding Credit Card Charge-Offs
A credit card charge-off occurs when a lender determines that a debt is no longer collectible. This is primarily an accounting measure, allowing the financial institution to remove the uncollectible amount from its active assets on its balance sheet. Financial institutions are often required to classify these debts as a loss for regulatory and accounting purposes, which helps reflect a more accurate financial picture for the institution.
A charge-off does not mean the debt is forgiven or eliminated. The consumer remains legally responsible for the full amount owed, and the lender still retains the right to pursue collection of the debt, either directly or through other means.
The Timeline and Triggers for Charge-Off
A credit card account typically gets charged off after a sustained period of non-payment. For credit card accounts, the industry standard for a charge-off is generally 180 days, or approximately six months, of consecutive missed payments.
Federal financial institutions examination councils and regulators, such as the Federal Deposit Insurance Corporation (FDIC), provide guidance that open-end accounts like credit cards should be charged off when they are 180 days or more past due. Accounts may accrue multiple 30-day late payment notations on a credit report before reaching this 180-day threshold.
Immediate Impact on Your Financial Standing
Once a credit card account is charged off, the immediate consequences for the consumer are significant. The credit card account will be closed by the issuer, meaning it can no longer be used for purchases.
The charge-off will be reported to the major credit bureaus, including Experian, Equifax, and TransUnion, as a serious derogatory mark. This notation will substantially damage the consumer’s credit score, as payment history is a major factor in credit scoring models, typically accounting for 35% to 40% of a FICO or VantageScore.
Subsequent Effects on Your Credit and Finances
A charged-off account remains on a consumer’s credit report for up to seven years. This seven-year period typically begins from the date of the first missed payment that led to the charge-off, also known as the date of first delinquency. Even if the debt is paid or settled, the charge-off notation itself usually remains on the credit report for this full duration, though its status may be updated.
The presence of a charged-off account makes it challenging to obtain new credit, such as loans, mortgages, or other credit cards, and can result in higher interest rates for any credit that is approved. Lenders view a charge-off as a strong indicator of past payment difficulties, increasing perceived risk. Furthermore, if the debt is partially or fully forgiven, the forgiven amount might be considered taxable income by the Internal Revenue Service (IRS). If a financial institution cancels $600 or more of debt, they are generally required to issue Form 1099-C, “Cancellation of Debt,” to both the consumer and the IRS.
Paths Forward for Charged-Off Debt
The original creditor may continue to attempt collection, or they may sell the debt to a third-party collection agency. When debt is sold, the collection agency acquires the right to pursue the full amount, plus any applicable fees.
Consumers have options for resolving charged-off debt. One approach is to pay the debt in full, which will update the account status on the credit report to “paid in full” or “paid.” While this does not remove the charge-off, it can be viewed more favorably by future lenders. Alternatively, a consumer may negotiate a settlement for a lesser amount than the full balance owed. If a settlement is reached, the credit report will typically reflect the debt as “settled for less than the full balance” or “settled,” indicating that the original terms were not met.