What Is a Credit Card Charge-Off?

Concerned couple reviewing bills
© Paul Bradbury / Creative RF / Getty

What Is a Credit Card Charge-Off?

If you're wondering about a charge-off, it's probably because you've found one on you credit report. Or, you've received a letter explaining that you were denied credit because of a charge-off on your credit report. The name "charge-off" can be misleading. You can easily think you've been let off the hook for this debt. Unfortunately, that's not the case.

Many people mistakenly think when a debt has been charged-off that it's been cancelled by the creditor.

This is not true. You are still responsible for paying off the balance. However, you will not be able to use your credit card to make purchases and you won't have the option of making minimum monthly payments on your balance. By the time your account is charged-off, it's likely been closed for several months.

How Charge-Offs Happen

Your credit card agreement requires you to make the minimum payment by the due date each month. If you're late, you can send a payment anytime between the due date and 29 days past the due date and avoid having any late payment notice placed on your credit report (you'll still be charged a late fee with most credit cards). However, if you haven't made your payment by the time the next due date comes, your payment is 30-days late and a notice will be placed on your credit report. Every 30 days a new late notice is placed on your credit report. The late notices progress in 30-day increments: 30 days late, 60 days late, 90 days late, etc.

until you reach 180 days late.

After 180 days, or six months, of non-payment your account will be charged off. Your account can even be charged off if you've been sending payments, but those payments were always less than the minimum due. You have to bring your account current by paying the full minimum payment if you want to avoid a charge-off.

Why Do Credit Cards Get Charged-Off?

Companies, including creditors and lenders, have profits and losses every year. They make money from profits and lose money from losses. When a creditor charges-off your account, it's declaring your debt as a loss for the company - because you haven't made a payment in awhile.

Even though the creditor has acknowledged your debt as a loss in its financial records, you don't get away free. Your creditor will add a negative entry (a charge-off) to your credit report and continue to attempt to collect on the debt. The credit card issuer may collect through its own collection department or by sending the account to a third-party debt collector.

The past due balance is legally enforceable (you can be sued for it) for several years depending on your state's statute of limitations on debt.

The charge-off will remain on your credit report for seven years from the date it was charged-off. Paying the charged-off balance in full won't remove it from your credit report. Instead, it will be updated with a status of "Charged-Off Paid" if you paid in full or "Charged-Off Settled" if you settled the debt and the account will show a $0 balance. Either is better than a "charge-off" status with an outstanding balance but are still undesirable.

The only way to remove a charge-off from your credit report is to wait the seven-year period or negotiate with the creditor to have it removed after you pay the account in full. This is a tough negotiation to make, but some creditors may agree if you make your case with the right person within the company.

Bouncing Back After a Charge-Off

While having a charge-off on your credit report is bad for your credit score, all is not lost. You can rebuild your credit after a charge-off by clearing up the delinquent balance, making timely payments on all your other accounts, and giving it some time. As the charge-off gets older, it will have less impact on your credit score, especially if it's outweighed by other positive information.