Understanding Credit Card Charge Offs
“Charge-off” is an accounting term used when a creditor removes an unpaid debt from their list of assets. This happens when they are unable to collect the amount they are due to receive from a debtor. For accounting purposes, the debt is considered uncollectible. But most creditors will still make attempts to collect the debt, or sell it to a collection agency. Collection attempts often continue for years.
Charge-Offs Damage Credit
Charge-offs will have a negative effect on a credit score. It is generally impossible to get real-estate financing and purchase a home until the credit card charge-off accounts are paid-in-full or settled-in-full. Even then, the fact that the account was charged-off in the first place can make it more difficult to obtain additional credit in the future. A charge- off can stay on a credit report for up to seven years.
Charge-Offs & Collection Agencies
When a creditor charges-off a debt, they will often assign it to a collection agency. Collection agencies usually put more pressure on debtors to repay the outstanding debt. Just having a collection agency involved puts more bad marks on a credit report, and it is more difficult to negotiate or reason with a collector compared to an original creditor in most cases.
Avoiding Charge-Offs
Typically, just starting to make regular payments is enough for creditors to label a debt “current” or “past-due” rather than writing it off. Many credit cards issued by banks will be brought current if the debtor enrolls in a credit counseling program and resumes making regular payments. Debtors can ask creditors to draw up a new loan for the amount owed with lower payments. Sometimes they may be willing to lower the interest rate as well if they believe doing so will help you to repay the debt.
The Silver Lining
Believe it or not, there are a few good things that can come from a charge-off:
- After a charge-off, creditors may be more willing to agree to settle for less than the original balance owed because the charge-off indicates there’s a chance that the debt may never be paid at all.
- Most creditors will agree to stop charging interest and fees if payment arrangements can be made on charged-off debts.
Even though charge-offs could lead to successful debt settlements and reduced interest and fees, consumers would be best to repay their credit card debts if they can afford them.
