What is a credit card charge-off?
Key takeaways
- A charge-off is a debt that has gone unpaid for a sufficient amount of time and is deemed uncollectible by the creditor.
- Charge-offs do not erase your debt, and you are still responsible for paying it. It may be handed over to a debt collector and can stay on your credit report for up to seven years.
- It is best to avoid charge-offs, and if you are struggling to make payments, reaching out to your creditor for a hardship program may be a helpful solution.
The language used in credit reporting can often be confusing to consumers. The term “charge-off” can be one of those somewhat baffling terms. In this guide, we’ll discuss what credit card charge-offs are and what they mean for your credit reports and scores.
What does a credit card charge-off mean?
A charge-off is a debt that has gone continuously unpaid for a sufficient amount of time — usually around 180 days — and that the creditor has given up on trying to collect. Up to this point, the account has counted as an asset on the creditor’s balance sheet.
When it is deemed uncollectable, it can no longer be counted as an asset and is “charged-off.” While that may sound like the creditor has tossed out your debt, that’s not the case. The write-off is purely an accounting function that applies only to the company’s balance sheet, not your debt. You still owe the bill, and they still expect you to pay it.
How does a charge-off affect your credit score?
In a word, badly. Charge-offs, by their nature, mean that you haven’t paid your bills.
Payment history is the most influential factor in FICO scoring and accounts for 35 percent of your total score. Charge-offs usually happen after about six months of non-payment. So, for every month the account gets further behind, your score takes another hit. By the time a charge-off happens, your credit score will have significant damage (second only to bankruptcy).
Once you cross that 180th day, the charge-off does major damage — even if you had a good score to begin with.
Do you still have to pay charged-off debt?
Yes. Once an account is charged-off, your debt will likely be handed over to a debt collector. If that happens, your credit report will reflect a zero balance on the charge-off, probably with a note saying “sold to” or “transferred to” and the name of the collection agency. You’ll also have a new line called “collections” that shows the balance due, a note on the account saying “transferred from” or “sold to” and the name of the collection agency.
Keep in mind: A charged-off balance does not relieve you of your responsibility to pay. It may change who you have to pay, but it does not erase your debt or the fees. Plus, interest may continue to accrue.
As long as there is an amount listed under the charge-off, you can contact the original creditor to make payment arrangements. But once it moves to collections, you will likely have to work with the collector. Also, you should know that once a charge-off happens, the debt will often remain on your credit report for up to seven years after the date of the original or first delinquency, whether you pay it off or not.
The same is true of collections, which are treated as an extension of your loan from the original creditor and will usually be deleted at the same time in seven years. Some future lenders may look more favorably at a charge-off paid notation — which is one good reason to come up with a way to pay the debt. No matter what, though, you will still owe the money.
Can you still get a credit card after a charge-off?
You will probably still be able to get a credit card after a charge-off, but you may receive a higher interest rate, and your options may be limited depending on how low your score is.
There is no law requiring creditors to offer you credit. Each lender will look at your situation from their own point of view and risk tolerance. What they decide to offer you — if anything at all — is totally up to them.
If all else fails, you can apply for a secured credit card to get you back in the credit card game. These cards look and function the same as any other credit card, but they’re easier to get because you give a cash deposit as collateral upfront. If you must go this route, be sure to choose a secured card that reports to the credit bureaus so that the work you do to improve your credit standing is noted.
How to recover from any credit score damage
As with all things credit reporting and score-related, getting positive data onto your file after you have done some damage is the best way to rebuild your credit. This starts with paying all your bills on time, every time.
Here are some additional ways to begin building your credit score:
- The best way, of course, to undo any damage to your credit score is to figure out a way to repay any charge-offs you have. Again, even if it still counts against you for a while, future lenders will see that you have been working to make it right.
- Work to reduce your credit utilization to below 30 percent. The lower the usage amount, the better for your score.
- Don’t close old credit card accounts unless you must. Length of credit history accounts for 15 percent of your FICO score.
- Create a budget and stick to it.
- If you are able, consider taking on secondary income, such as a side hustle, small business or additional work to support the funds going toward paying off any debt.
The bottom line
If at all possible, you should avoid charge-offs and the resulting collections. If you need help paying your credit card bill, don’t wait to reach out to your creditor and ask about a hardship program. Although that is generally a short-term solution, it could be the answer that will keep you from facing a charge-off in the future.
