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What Is a Credit Card Charge-Off?

By Alyssa Schwartz · April 27, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is a Credit Card Charge-Off?

Many people struggle—whether from time to time or an ongoing basis—to pay their bills. When it comes to credit cards, an inability to make even the minimum monthly payment can result in something called a charge-off, which can have long-term implications on a person’s finances.

What is a charge-off? A charge-off occurs when a credit card goes unpaid for 120 to 180 days and the financial institution determines that the debt is unlikely to be paid off, counts the outstanding balance as a loss, and closes the account.

But a charge-off doesn’t mean the debt ceases to exist and that the cardholder no longer needs to pay it off. Instead, typically the bank or credit union either hires a debt collector to pursue the money it’s owed or sells the debt to a collection agency.

Though the lender will take a hit on the money owed—the debt collector will either take a share of any funds recovered, or the bank may sell off the debt entirely to the collector at a reduced rate—the story isn’t over for the borrower.

What Happens When You Have a Charge-Off?

When a credit card account is charged off, the account holder will receive a notice to that effect. They’ll then have a few options for paying off the debt, including working out a repayment plan with the creditor and attempting to come to a settlement for an amount less than the original debt.

A person can also choose to do nothing at all. Credit card debts are subject to a statute of limitations that prevents creditors from pursuing unpaid bills after a certain period of time (the time limit varies from state to state, but is typically between three and 10 years).

Once that statute of limitations is up, a debt collector can no longer seek court action to force repayment, but the Federal Trade Commission points out that under certain circumstances, the clock can be reset.

Again, though, simply running out the clock on a charge-off does not mean there are no consequences for the cardholder.

How Does a Charge-Off Affect Credit Rating?

To understand the implications of a credit card charge-off, it’s worth thinking about how you get a credit card—or any other type of borrowing product, including a mortgage or car loan—in the first place.

Individuals have credit scores, which help credit card companies, lenders, and other institutions determine the risk of making payments. Credit scores are one factor among many used to evaluate an individual’s application for a car loan or mortgage—even an application for an apartment rental or new cellular phone account.

A person’s score not only helps to determine whether they will be approved but also the interest rate they will pay and other terms.

A credit score is a snapshot of a consumer’s financial history—their record of bill payments, how much credit they are using, and other such details.

Credit scores are built over time, reflecting years of credit habits. As such, any past credit card charge-offs are indeed reflected in a person’s credit score and on their credit report, letting future prospective lenders know they have a history of delinquent or unpaid bills.

The Process of a Charge-Off

While parameters for a charge-off vary from lender to lender, here’s what typically happens: After an individual does not pay their credit card minimum for six months, the account becomes delinquent. After the first month of delinquency, the credit account is moved from the “Accounts in Good Standing” section of their report to “Negative Items” or “Negative Accounts,” along with the outstanding balance.

If the credit card company decides to charge off the debt at 180 days, this is then noted on the person’s credit report as a charge-off.

Even with a charge-off, the outstanding balance will remain on one’s credit report (noted as a charge-off), unless it is sold to a collection agency. In that case, the balance reverts to zero but the charge-off remains.

Consequences of a Charge-Off

A charge-off stays on a person’s credit report for seven years from the first delinquent payment date—usually even if they pay off their debt in full or the statute of limitations runs out. In fact, once consumers have a charge-off on their record, it can be difficult to have it reversed.

Among the consequences of having a charge-off on a credit report: It could result in higher interest rates on future lending products, or even being turned down for a credit card or loan.

There are a few scenarios where cardholders might be able to have a charge-off taken off their credit report. For starters, if an individual can prove that the charge-off was inaccurate, they can apply to have it removed under the Fair Credit Reporting Act. It can also be helpful to reach out to the creditor directly to try to reach a resolution.

It may be possible to have the charge-off removed as part of a debt settlement agreement or on a goodwill basis in the event of personal hardship or an honest mistake—though there are no guarantees!

If You Face a Credit Card Charge-Off

A credit card charge-off on a credit report can make anyone’s financial life more difficult, so prevention may be the best bet.

This means developing habits for using a credit card responsibly: setting a budget and ensuring that there’s enough money on hand to cover everyday and impulse purchases, keeping a close eye on credit card statements, and adhering to payment schedules. Even if a cardholder can’t afford to pay more, it’s a good idea to always pay at least the minimum, on time.

But even if they become overextended, cardholders can take additional steps to try to head off a charge-off.

For starters, ignoring the problem will not make it go away. Because an account must be past due for several months before it will be charged off, it’s vital that cardholders take action as soon as they fall behind on credit card payments.

Contacting the bank to try to arrange a payment plan, switching to a lower-interest credit card, or consolidating debt with, say, a credit card consolidation loan are all steps that can be taken that can help to get a handle on credit card bills before getting to the point where a charge-off dings a credit report..

But if a credit card account is charged off, it may continue to accrue interest until it is paid, thanks to a debt collector. Once the balance is finally paid off in full, it will be noted on the individual’s credit card report.

Depending on the credit scoring model used, paying off the charge-off or collection can reduce the negative impact on a credit score. It may also be wise to contact the lender to discuss a payment settlement, which may also reduce the credit impact.

The Takeaway

A credit card charge-off may haunt a credit report for years, so preventing a charge-off may be the best bet: developing responsible credit card habits, consolidating debt, or trying to arrange a payment plan.

The SoFi credit card makes strategizing easier.

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