Don’t Let Your Credit Card Be Charged-Off

No one plans to let their credit card be charged-off when they apply for a credit card, but it happens to even the best of us. A credit card charge-off is what happens when you go more than six months without paying your credit card bill. While the name sounds like you’re being let off the hook for what you owe, a charge-off is one of the worst things that can happen to your credit card.

Credit card lates progress from 30-day to 60-days, then 90-, 120-, and finally 180-days late. In that time, you’ve been charged six late fees ranging from $25 to $35 each and your balance has probably grown significantly with fees, interest, and missed payments. Once your payment has become 60 days past due, your credit card issuer can raise your interest rate to the default rate, which would increase the finance charges added to your delinquent balance.

While fees and interest are being added to your credit card balance, the credit bureau is being notified of your late status. Every 30 or so days, your credit card issuer sends the credit bureau an update on your credit card status. Thirty days late won’t look so bad, but as your late payments progress, your credit report gets worse and worse. The final charge-off is a scarlet mark on your credit report, telling everyone who checks your credit report that you were seriously delinquent.

Since your credit report is a direct feed to your credit score, your credit score will suffer when your credit card gets charged-off. Remember that your payment history has the most significant impact on your credit score – accounting for 35% of your total score. It’s hard to predict just how much your credit score will fall because it depends on the other information on your credit report.

Charged-Off But Not Forgiven

A charge-off is an accounting term that credit card companies use to refer to debts that have been written off their books and deemed uncollectible. They get to use these debts as a tax deduction. However, credit card companies will still pursue you for a charged-off balance. If you’re collecting from you themselves, then they’ll hire a third party debt collector to come after you for the balance. Debt collectors can also report the debt on your credit report.

Once your credit card balance has been charged-off, you may be able to negotiate a settlement that’s less than the total amount you owe. This at least gets you off the hook for the debt. However, if the difference between the original and settled amounts is more than $600, you’ll owe income tax on the additional amount.

Charge-offs will be listed on your credit report for up to seven years from the date the account was charged-off. Eventually, they’ll affect your credit score less and less. Unfortunately, until the credit reporting time limit has passed, anyone who checks your credit report will be able to see that you once had a credit card that charged-off. Preventing a charge-off is simple: don’t let your credit card payment get 180 days past due. When you notice you have a hard time making your credit card payment, contact your credit card issuer.