Borrowers often hear terms like ‘charge-off’ in the context of credit cards and loans. A credit card charge-off means that the creditor has given up on collecting the outstanding debt due to the prolonged period of non-payment. A charge-off does not signify a paid-off debt obligation. Rather, it simply means that the lender has classified your account as a loss for accounting purposes. This article highlights the meaning of a charge-off in detail to help you understand its repercussions on your credit score and credit history.
What is a Charge-Off?
A charge-off means that the creditor has written-off (charged off) your unpaid balance as a loss on their accounting books. When a credit card is charged-off, it means that the creditor is no longer trying to collect the outstanding payments due on your credit card. Credit card companies and personal loan lenders typically resort to a charge-off when the loan account becomes severely delinquent. Typically, creditors charge-off accounts often around 180 days of non-payment. However, the charge-off rules may differ from one lender to the next. Having a charged-off account on your name can cause serious damage to your credit score and future borrowing ability as well.
How Does a Charge-Off Work?
Now that you know the meaning of charge-off, it’s time to understand how a charge-off works. A charge-off occurs when the creditor believes that the outstanding debt is uncollectible, typically after 180 days or 6 months of non-payment. However, a charge-off does not eliminate your obligation to repay the credit. The lender classifies the debt as a charge-off for their internal accounting purposes, removing the credit from the list of active accounts. As the borrower, you are still legally obligated to repay the loan that’s marked as a charge-off.
Let’s understand this better. Your monthly credit card statement specifies the minimum payment due on the account as well as the due dates. However, you may miss a payment due to various unforeseen circumstances. Credit card companies allow you to pay the dues anytime between the due date and 29 days post the due date. If you make the payment after the due date, you will need to pay late fee charges as well. However, if payments are delayed further and you keep missing due dates, a notice is placed on your credit report. Notices are placed after every 30 days of non-payment. Once this nonpayment crosses 6 months, the account is classified as a charged-off account. It is important to note that this could happen even if you made payments below the minimum amount due during this period.
Are Charge-Off and Write-Offs the Same?
Most borrowers assume a charge-off and write-off are two synonyms. However, in the world of accounting, a charge-off and write-off are completely different. Debt that’s charged-off is written-off as a loss. It is not considered paid-off. The lender can write-off your credit card dues as a charge-off for accounting purposes, but still hold the right to pursue collection of these dues at a later time.
Do Charge-Offs Impact Your Credit Score?
It is clear that a charge-off impacts your overall credit score. Let’s understand the ways in which a charged-off account can impact your score:
- Missed payments: Your repayment history is one of the most important factors impacting your CIBIL score. Missing even one payment can lower your score by a significant degree. Your credit score experiences subsequent reductions with each missed payment leading up to the charge-off.
- Remains on record for 7 years: A charge-off remains on your credit report for 7 years. Even if you pay-off a charged-off account, the status is simply changed to ‘charge-off paid’. Yet, it still remains a part of your credit report.
- Difficulty in securing future credit: Since a charge-off severely damages your credit score and it signals that you failed to repay credit, obtaining credit in the future can become challenging for you. Once you have a charged-off account in your credit report, it becomes harder to secure approvals for loans and credit cards.
How to Deal with a Charge-Off
Here are a few ways you can deal with a charge-off:
- Review your Credit Report
Obtain your credit report and check it carefully. Verify if the charge-off is accurate, including the date of the first delinquency and the amount owed. If not, you should raise a dispute immediately.
- Consider Debt Settlement
If you find your credit card heading for a charge-off, you can consider debt settlements. Settling your dues at a lower rate can impact your credit score but have fewer repercussions than a charge-off or default.
- Rebuild Your Credit Score
If your credit card is already charged-off, you can take steps to rebuild your credit score. Paying the rest of debts in a timely manner and demonstrating responsible credit behaviour, you can rebuild your credit score over time.
Conclusion
A charge-off on your credit card or loan means that the lender has written-off the debt as a loss because the lender believes that the unpaid dues are uncollectible. Having a charged-off account on your credit report can severely hamper your credit score, compromising the possibility of securing future credit. Ideally you should borrow responsibly to avoid circumstances where a charge-off may become imminent. If you do end-up in a financial crisis unable to repay your dues, try contacting the lender or opting for a settlement to avoid a charge-off. You should note that a charged-off loan still carries a repayment obligation. The lender reserves the right to sell the account to a third-party collection agency that may pursue future collections.
Key Takeaways
- A charge-off happens when the lender writes off your unpaid debt balance as a loss after 180 days of non-payment.
- Charge-offs do not erase the payment obligation. The lender can still pursue collections.
- A charge-off can lower your credit score and can remain in your credit report for up to 7 years. Paying-off your charge-off can improve your credit.
Frequently Asked Questions
How Does a Charge-Off End Up on Your Credit Report?
Charge-offs can end up on your credit report due to a prolonged period of non-payment. While the specific terms can vary depending on the lender, for most a non-payment period of 120-180 days is considered.
How Much Can a Charge-Off Affect Your Credit?
A charge-off is essentially missing a financial commitment. Therefore, it can affect your credit score in the same way as late or missed payments. Similar to such payments, a charge-off remains in your credit report for up to 7 years compromising your ability to acquire loans and credit on favourable terms.
Should You Pay a Charged-Off Account?
Yes. You should pay a charged-off account because you are still legally responsible for the debt. You will remain responsible for their payments until you clear the dues, settle with the lender, or discharge them by declaring bankruptcy.
Is a Charge-Off Worse Than a Collection?
Generally, a charge-off is considered worse than a collection primarily because you have more negotiating power to have a collection removed from your credit report. With a charge-off, it remains a part of your credit history for 7 years even after you clear the charged-off dues.
