What Is a Credit Card Charge-off?

If you have read the terms and conditions of a credit card, you may have come across the term ‘credit card charge-off’. But, what does it mean and what are its repercussions?

Technically, credit card charge-off means that the credit card issuing bank has stopped considering the debt owed by an individual as an asset, even when they have not yet repaid it.

However, many people get confused between a “charge-off” and a “write-off”. If your debt is charged off, it does not mean that you are not liable to repay your debt amount. The company merely writes off the debt as a loss for its own accounting purposes. However, the creditor still has all legal rights to collect your outstanding dues in the future.

How Does a Credit Card Charge-Off Work?

A “charge off” connotes that the company has written off a debt that it does not think will be able to retrieve. However, this does not remove the legal liability of the debtor to repay.

A credit card requires you to pay a minimum payment within the due date at the end of every month. But when you miss paying it within the due date, you are still given 29 days from the due date to pay the amount along with some late fee charges.

But if you still fail to pay within this date, you will get a notice on your credit report on the 30^th day. Continuous notices will be placed on your credit report every month when you do not repay your debt. However, once you cross the limit of 6 months and are yet to pay the amount, your credit card account will be charged off.

Such an instance can also happen when you make a payment that is below the minimum amount due to the credit company. When this happens, the creditor will record your debt as a loss on their balance sheet. Then, they may sell off your account to a debt buyer or a collection agency. 

How Does a Credit Card Charge-Off Affect Me?

A credit card charge-off has a severe effect on your credit report. The creditor reports this charge-off to the credit bureaus. They will enter a charge-off in your credit report which will continue to show up for up to 7 years from the time your account goes delinquent.

Rather than showing under “Account in Good Standing”, this charge-off will show under “Negative Items” or “Negative Accounts” in your credit report. The creditor might also decide to sell your account to a third-party collections agency. Then, your account will show under “Account in Collections” in your report.

The cumulative result of this will be that it will adversely affect your credit score. It has a worse effect than a payment plan or a loan settlement, depending on the credit scoring model. This will, amongst other things, make it very difficult to get a credit card or a loan from any bank or non-banking financial company.

Would I have to Repay the Charge-Off? 

Whether you are liable to pay the charge-off depends entirely on if your charge-off has been made in error or is legitimate. If after investigation, you have found out that the charge-off is legitimate, you must act fast and try to pay it off. 

The creditor might have stopped trying to collect on the account. However, as long as the debt is not being repaid or settled or discharged in a bankruptcy filing, you are legally responsible for it.

A major consequence of non-repayment of the debt amount can reflect in the form of an adverse effect on your credit score. This will ultimately make it hard for you to get a loan or a credit card with a bad credit score.

Thus, you must pay off your charge-off as soon as you can. You can settle it with the original credit card issuing bank if it has not sold off the debt to a collections agency. You can also negotiate a settlement with the bank wherein you might benefit from negotiating a settlement at a price lower than what he owed. You will need to repay the dues to the collections agency if your bank sells off your credit card account to it.

However, in certain instances, you may also find that the charge-off is actually an error which is showing in your credit report. A charge-off could have been recorded in the past as it is not erased from your report even after 7 years. 

In such cases, you should immediately take up a dispute with the credit reporting agency. Credit reporting agencies will investigate your dispute and produce a report within 30 days of the filing date. If your dispute is found to be legitimate, you will need to inform the credit card issuer about this discrepancy.

How to Avoid a Credit Card Charge-off?

There are some simple ways in which you can avoid having a charge-off recorded in your credit history. One of the easiest and best ways to do it is to make the minimum payments on your credit card on time every month. 

Making the minimum payment every month will help in stopping the account from cycling into the next month. It will also prevent your credit score from falling massively. If you are facing a charge-off on your account, you should contact your creditor and try to negotiate a settlement. This will minimise the negative impact on your credit score.

Furthermore, you must also know that timely credit card payments account for around 35% of your credit score. But not every late payment impacts your credit score in the same way. 

A 90-day late payment can harm your credit score way more than a 30-60 day late payment. In a 30-60 day late payment, even making the minimum payment and bringing the account back to a current status will improve your affected credit score with time.

Final Words

A credit card charge-off is recorded in your name if the creditor does not think that it will be able to retrieve your outstanding dues. However, this does not remove your legal responsibility to repay the amount.

In case you do not repay the debt, a charge-off will severely affect your credit score and it might become hard to get a loan or a credit card again. Therefore, you should always try to avoid falling into a charge-off.

Frequently Asked Questions