What Is a Credit Card Charge-Off?
Key points about: credit card charge-offs
A credit card charge-off is when a creditor determines an overdue debt will not be paid and has written it off as a loss based on the original loan terms.
The cardmember is still legally obligated to pay the debt after a charge-off.
If the creditor can’t successfully collect the debt themselves, they may hire a collection agency or lawyer to try and collect it.
A credit card charge-off happens when a credit card company no longer considers the debt to be an asset, i.e., the creditor deems the account uncollectable and has written it off as a loss. It’s important to remember, though, that the debt is still owed. While no additional charges and, in some cases, no additional interest charges will be added to the account, the charge-off status will be reported to credit reporting agencies and could impact your credit score.
Still, there are ways to improve your credit after a charge-off. Let’s explore more about what a credit card charge-off is, and some credit repair tips you can use if you’ve had a charged-off credit card account.
When do charge-offs occur?
Charge-offs typically occur after an individual has failed to make the minimum required payment on their credit card debt for at least 180 days.
After that, the lender no longer considers the debt an asset, but at the same time, the lender won’t stop trying to collect.
That last point is important: a charge-off does not mean the delinquent cardmember doesn’t have to pay their debt. When the credit card issuer writes off the debt, it applies only to the issuer’s balance sheet. The cardmember is still legally required to pay the debt.
After a charge-off, who’s trying to collect payment can change, though. Many card issuers will first attempt to collect the debt themselves, but after a period of unsuccessful attempts, they’ll often hire a debt collection agency or attorney to collect on their behalf. In some cases, they may sell the debt. When debt is sold, its new owner may appear on your credit report along with the original creditor.
How does a credit card charge-off affect your credit?
A charge-off will appear on your credit report for up to seven years after the date the charge-off account first went delinquent. Because payment history is such an important factor of your credit score, even one missed or late payment can negatively affect your score. After several late payments and the account has been charged off, you’re likely to see a significant impact to your score.
The cardholder has the right to pay off the debt at any point after the charge-off, upon which time the amount will convert from an “unpaid collection” to a “paid collection” on their credit report. Payment does not remove the charge-off from the credit report, however.
Tips to stay on top of your credit
Did you know
Even though a charge-off usually remains on a credit report for up to seven years, there are still ways you can rebuild your credit during that time.
Make all payments on time. Don’t put yourself back in a situation where a charge-off might occur. Making at least the minimum payment on your credit card bill on time, every month, will slowly help build up your credit.
Also, don’t apply for too many new lines of credit. Applying for many lines of credit in a short time results in hard credit inquiries, which may reduce your credit score.
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