Your credit has been “charged off.” What does that mean?

Over the past couple years, credit card charge-offs have been on the rise, with rates over 3.8% during the first quarter of 2019, the highest level since 2012, according to the Federal Reserve. We have yet to see how the economic ripples of the COVID-19 pandemic will affect this number.

How and why do credit charge-offs happen?

A credit card charge-off occurs when you have failed to make your credit card payment for over 180 days and the credit issuer considers the debt to be uncollectible. When a creditor charges off your account, they are declaring the debt a loss for the company, as you have not made a payment in a long time.

Normally, your credit card agreement requires you to make the minimum payment by a due date each month. If you miss a deadline for the month, you will be charged a late fee (at least with most credit cards) and can still make a payment between the due date and 29 days after the due date to avoid having a late payment notice appear on your credit report.

However, if you fail to make your payment by your next due date, your payment is at least 30 days late and a notice will appear on your credit report. Every 30 days, a new late notice is placed on your credit report until you reach 180 days late, which results in your account being charged off. 

A charge-off can also result from paying under the minimum payment each time.

What to do if you get charged off

After your credit card gets charged off, it does not mean you can get away without paying off your debt. Not only will a charge-off notice be added to your credit report, your creditor will also continue to try to collect on the debt through its own collection department or sell the debt to a third-party debt collector and you would then owe the collection agency instead.

Depending on your state’s statute of limitations on debt, your creditor can sue you for not paying the past due balance during the next several years. Even after your state-mandated statute of limitations expires, your card issuer is legally entitled to pursue the debt in full.

Consider consulting a bankruptcy attorney if you have overwhelming debt and are unable to make payments. If you can’t get the debt erased, entering a debt management program or seeking credit counseling can help you and your creditors come up with a reasonable repayment plan to help eliminate your debt.

If the charge-off was due to a temporary setback, you can also try writing a goodwill letter to your lender and asking it to remove the charge-off from your credit report, especially if you had a history of on-time payments since the charge-off.

What does a charge-off mean for you and your credit?

The charge-off will remain on your credit report seven years after the date it was charged off. Even if you pay the charged-off balance, it will only be updated with the status “Charged-Off Paid” if you pay all the balance, or “Charged-Off Settled” if you settled the debt.

The only way to remove a charge-off from your credit report is to wait the seven-year period or negotiate with the creditor to have it removed after you pay off all the charge-off balance, which is very difficult.

A charge-off, along with the preceding late payment, will undoubtedly lower your credit score. Having a bad credit score can hinder you from qualifying for mortgages, auto loans, new credit cards, and it may also lead to higher interest rates on loans. However, as the charge-off gets older, it will have less impact on your credit score, especially if there is other positive information on your credit report. 

The best thing you can do to rebuild your credit is by paying off any balance you may owe, making timely payments to all your accounts and simply waiting. Meanwhile, you should make sure to keep all your accounts current and try to use only a small amount of your available credit on other cards.