Credit Card Charge-Off

Why It Is Terrible News for Your Credit

stack of Credit cards
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Missing too many credit card payments in a row can spell doom for your credit card. Eventually, your credit card issuer will charge-off your credit card and add the account status to 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 canceled by the creditor. Unfortunately, you're 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.

How Credit 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 before the 30-day late mark and avoid having any late payment notice placed on your credit report. 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 a while.

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.

Charge-Offs and Credit Reporting

The charge-off will remain on your credit report for seven years from the date it was charged-off. 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.

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. It 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

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.

  • A charge-off happens if your credit card is 180 days (or six months) past due.
  • You won't be able to use your credit card or make minimum payments toward the balance.
  • The charge-off status goes on your credit report and stays for seven years.