A credit card charge-off is the worst credit card status you can have. That’s why you should avoid letting your credit card get that delinquent, if you can help it.
How Charge-Off Happens
You’ll have plenty of warning before your account gets charged-off. Each month that you’re delinquent the credit card issuer will contact you via phone, mail, or even email to let you know that your account is seriously delinquent and in danger of default. At first, they may only include a notice in your billing statement. But, after a couple of missed payments, they’ll start sending separate letters and making phone calls to get you caught up on your balance.
Unfortunately, the further you get behind on your payments, the harder it is to catch up because of compounding late fees and interest. Imagine trying to stop a snowball. It’s easier to catch it when it first starts rolling, but it gets harder as the ball rolls further down the slope.
After your credit card payment is 180 days, or six months, past due, the creditor will charge it off. A charge-off is when the creditor writes off the account as uncollectible. They report the account as a loss on their accounting statements, but they don’t let you off the hook for the debt.
Charge-offs may be referred to the creditor’s collections department for further collection effort or they may be assigned or sold to a third-party collection agency. Your creditor may stop contacting you completely, but don’t be surprised if collection calls resume months or even years after the debt’s been charged-off.
The Result of a Charge-Off
A charge-off might make it hard to get approved for new credit cards, loans, even apartment rentals. Your insurance rate may increase. And, the charge-off could even cost you a new job or promotion at your current job.
Like most other negative types of information, a charge-off will stay on your credit report for seven years from the date the account was charged off. However, if the charge-off is inaccurate, you can use the credit report dispute process to have the error removed from your credit report.
Paying a Charged-Off Balance
Paying the charge-off in full is usually the best option, but it doesn’t necessarily erase the negative entry from your credit report. It does help, in the sense that a $0 balance is better than an outstanding balance, but you’ll still suffer the damage of having the charge-off to begin with.
Some creditors may be willing to entertain a pay for delete negotiation where you offer payment in exchange for having the account removed from your credit report. But, remember that creditors have the right and contractual obligation to report accurate information to the credit bureaus. So, they may turn down your pay for delete request.
An alternative to paying the account in full is to settle the charge-off balance by getting the creditor to agree to accept part of the balance and cancel the rest. While the balance will be reported as $0 on your credit report, it will also be reported as settled, something that might be unfavorable to future creditors. But again, a $0 balance is better than any other type of balance.
The other potential downside to settling is that you will owe taxes on the amount that’s settled. The IRS requires creditors to report any cancelled debts over $600. Claiming an insolvency exemption (if you had a negative net worth when the debt was cancelled) will help you eliminate the tax liability of settling a charge-off.
Whether you pay in full or settle the account, taking care of the charged-off balance is best. Even though the charge-off will remain on your credit report for seven years, it will hurt your credit less as the charge-off gets older and as you pay all your other accounts on time.