What Happens When a Credit Card is Charged Off?

You didn’t pay it, and you didn’t pay it again, and then you didn’t pay it some more, and finally, the credit card company gave up and stopped expecting you to pay the bill altogether. It charged off your credit card debt.

Sounds mighty good, right? You’re thinking maybe you should congratulate yourself for outlasting the card company!

But don’t. Congratulations most definitely are not in order.

Yes, a charge-off means the credit card company has written your debt off as a loss. And yes, that means the company will stop sending you those pesky monthly bills you haven’t been paying. But when that happens, don’t assume you can just pack up your credit card troubles and smile, smile, smile, because the truth is you haven’t achieved anything. You didn’t outlast anybody, and most importantly, you didn’t beat the system. You’re just up against different parts of the debt recovery complex now, and those parts are even more formidable than the card company you’ve been fighting.

In fact, a charge-off is just the beginning of a downward debt spiral you put in motion when you stopped paying your credit card bills. You still owe that money, and the consequences for not paying it back get more dire with each loop down that corkscrew coil.

What Is a Charge-Off?

It doesn’t matter why you didn’t pay the bills. Maybe you couldn’t. Maybe you misplaced them. Maybe you forgot. Maybe the dog ate ‘em. Maybe you just didn’t want to. Maybe you’ve even been making partial payments but are still delinquent on your debt.

Whatever. If the credit card company isn’t convinced you’re going to meet your full obligation, it eventually gives up on you and formally declares that debt to be uncollectable. That’s when you get the notice, either from the credit card company or from your credit report, that your debt has been charged off.

It usually takes 180 days – six monthly bills – of nonpayment before a credit card company declares a charge-off, but that time frame isn’t etched in stone. It could happen sooner. When it does, the company formally writes off the debt, effectively taking what you owe on the assets side of its balance sheet and placing that amount on the expenses side. That move negatively affects the company’s bottom line, but it also knocks a little off its tax liability.

Then it closes your account. You won’t be able to use the card going forward.

Then it tells the credit bureaus about your bad behavior.

Then your credit score nose-dives.

And then that bad behavior lives on your credit report for the next seven years. Any potential future creditor will see it when they consider your application for another credit card, home, auto, or any other type of loan.

Meanwhile, you still owe the money, and you’ll still be subject to some aggravating efforts to pay it back. See? You didn’t outlast the card company at all.

Credit Card Charge-Off vs. Collections

Just because the credit card company gives up trying to collect your debt by charging it off doesn’t mean nobody else will come after you for payment. In fact, whether or not a charge-off has been declared, the credit card company can hire a third party to continue the effort or even sell your debt to a collections agency.

Debt collection is the next step in the campaign to get you square with what you owe. A charged-off credit card might only be the start of your worries.

In fact, if the unpaid monthly bills from the credit card company annoy you, you’ll likely be especially vexed by the tactics a collection agency can use in its crusade to make you pay. Phone calls, over and over again, even at work. Emails and texts, also over and over again. Reach-outs to your relatives. Research into your personal financial situation. Garnishment of your wages, if it gets that serious.

You have some protections against predatory debt collectors, thanks to federal and state regulations. But even if a collector is acting according-to-the-rules, their numerous approaches can be exasperating.

One important distinction between a credit card charge-off and a debt collection service: The impact of a charge-off generally will be harder (and probably longer-lasting) on your credit than a record of your debt being turned over to a collector.

What Happens to Charged-Off Debt?

Your debt is still there. You still owe it. At this point, several things can happen. Many of them involve your debt becoming a way for other people or companies to make money off it. That’s one reason it doesn’t just disappear when a credit card company gives up on collecting it. It’s still valuable to others.

Here are some of the options for what might occur with your debt when it’s charged-off:

• A third party is hired to collect it. If the credit card company brings in someone else to take responsibility for getting you to pay, it usually gives the third party or collections agency a percentage of whatever money it collects.
• Your creditor sells it. When the credit card company sells your debt to a collector, the price of the sale generally is significantly lower than the amount of the debt. That allows the collection agency to turn a profit as soon as it gets more out of you than it paid to collect it.
• You can use debt settlement. If your creditor is OK with it, you can enter into a debt settlement agreement with a private company to negotiate a reduction in how much you owe. You make payments to the private company in an escrow account instead of to the credit card company until the account grows to the negotiated amount. Here’s what’s in it for the debt settlement company: It charges you as much as 15%-25% of the original debt.
• You get sued over it. When even the collection agency gives up on getting you to pay, it can file a lawsuit in civil court to get a judgment against you.
• You continue to get pestered about paying it off. Those calls from debt collectors? Those letters? They won’t stop. The more pressure a debt collector puts on you, the more likely you are to throw up your hands and say, “Fine! Here’s my money. Take it! Just leave me alone!”

Does a Charged-Off Credit Card Affect Your Credit Score?

It certainly can affect your credit score, and most likely will. In fact, your failure to pay your credit card debt can show up on your credit report twice – the credit card company and a collection agency can report you if you stiff them both. As soon as either of them notifies one or all of the three major credit bureaus about your charged-off debt, your account status is updated accordingly, along with a record of your missed payments.

Because your credit score is determined on the basis of those credit reports, there is a very good chance your score will suffer when your credit card debt is charged off. Your payment history accounts for 35% of your credit score and the amount of your debt makes up another 30%, and those two factors are inextricably tied to a debt charge-off.

How much can it hurt? Credit scores range from 300 to 850 – the higher the better. Depending on the state of your credit history, debt delinquency related to a charge-off can cause a drop of as much as 50-150 points.

If that isn’t harsh enough, a charge-off and its associated missed payments and collections exposure stay on your credit report for seven years. That’s a lot of bad luck. It means today’s charge-off can bite you tomorrow and tomorrow and tomorrow! All those tomorrows creep at their petty pace year after year. As long as those demerits are on your credit report and your credit score suffers accordingly, any potential future creditor will have serious doubts about granting you additional credit. That could cause problems if, say, you need a car loan or a mortgage before the last syllable of that recorded seven-year timeline.

What to Do If Your Credit Card Is Charged Off

Ah, but don’t get us wrong. You aren’t helpless in the face of a credit card charge-off. You have a handful of action moves you can make to be sure everything is on the up-and-up about the status of your debt or to find a way to get past this financial pitfall.

Where to start? The first step is with a validation letter in writing about the details of your debt that the credit card company or debt collector by law must provide you within five days after you’ve been contacted about the charge-off. As soon as you get that written notice, start a fact-checking process. Remember, that credit card company and those debt collectors aren’t infallible. They make mistakes sometimes, too.

Next, we’ll briefly detail some of the measures at your disposal.

Verify Accounts

For openers, use the written validation letter to make sure the account at issue is yours; could be it belongs to someone with a similar name or social security number. If it’s yours, haul out your records and check your payment history against the missed payment claims in the charge-off document. Maybe you’re up to date after all and the creditor’s accounting is amiss.

If you find your debt has been charged-off in error, notify both the credit card company/debt collector and the credit bureaus that contain the charge-off. Do it right away and do it in writing. Include copies of your bank statements, the credit card company’s payment statements (if they apply), and whatever other records you have that prove you paid those bills.

Take It to Small Claims Court

If your written corrections to the credit card company or debt collector don’t get the response you need, you can contest the charge-off further by taking the creditor to small claims court. That allows you to make your case in front of a judge or magistrate. Organize your argument in the most persuasive way possible and it might work, especially if the credit card company or debt collector doesn’t bother to show up in court.

Pay the Debt

Yeah, we know. If you could’ve paid those bills before the charge-off, you would’ve. But if you can pay it now, you still should. Maybe you’ve finally found the money to do it, or maybe you’ve negotiated a revised payment or settlement plan with the creditor. It probably won’t erase the charge-off from your credit report altogether, but it might change the status of that unpaid debt from ‘charge-off’ to ‘charge-off paid.’ At the least, that change might give potential future creditors a slightly brighter glimmer of hope that you’ll be good for the new loan you want from them.

Check Statute of Limitations

This is a passive rather than an action move, but there actually is one way to outlast your creditors. Sort of. Debt collectors and creditors are limited in how long they have legal recourse to make you pay your debt. So, if all else has failed, you can keep an eye on your state’s applicable statute of limitations and just … wait. The length varies from state to state. Some last as few as three years. Others last six years. A few last even longer. Whatever it is, you can’t be sued for repayment once your state’s statute of limitations has passed. When that hammer no longer hangs over your head, it might be easier to ignore your obligation to pay off your debt.

Outlasting the statute of limitations isn’t a cure-all for a charged-off debt, though. You still owe the money. It’s still on your credit report for the full seven years. And depending on the state, collectors can still use their phone calls and letters and such to nag you to pay up even after the statute of limitations has expired. But at least they can’t take you to court.

Discuss Options with a Debt Counselor

If everything is in order with the charge-off – no errors by the credit card company or debt collector – then maybe it’s time to use your debt predicament as a wake-up call to get your finances straight. Of course, that’s easy to say and hard to do, but help is available if you think you can’t manage it on your own. Consider discussing your financial situation and future with a nonprofit credit counselor who is certified in areas such as consumer credit, money, and debt management.

Credit counseling can help you create an affordable monthly budget that will provide a road map to paying the kinds of bills you didn’t pay on the way to your current situation. If, for example, you can’t qualify for a new credit card or loan, or if you need help managing a large amount of debt, a counselor can offer advice about a debt management program that reduces interest on credit card debt and lowers monthly payments to an affordable level.

A session with a credit counselor will help you develop a personalized plan to solve your money problems. And if the counseling is provided by a nonprofit credit counseling agency, the service is free.

Tips to Avoid Charged-Off Credit Cards

Now you know what happens when one of your credit cards is charged off. And now you know it isn’t pretty. So, how do you keep the charge-off demons at bay?

This is what you do: Get in front of it as soon as you can. In a perfect world, you get in front of it before you fall behind on your payments far enough to fear there might be a charge-off looming large in your legend.

Here are some pointers for how to steer clear of a charge-off and its associated debt collection and credit problems:

• Set up automatic payments for bills. It’ll keep the human (that’s you) errors at bay, such as forgetting the due date or misplacing the bill.
• Build a realistic budget. By balancing your monthly income against your monthly expenses, your budget makes sure you have the money to keep current with your credit card bills.
• Stay in touch with your creditors. Don’t ignore their past-due notices. Talk to them about options such as partial payment plans. At the end of the day, they’d rather have some rather than none of what you owe them.
• Get caught up on delinquent accounts. If you’re three or four months behind on your payments, start making payments and do it ASAP. You’ll likely have to pay extra to get even because of late fees, but it’s worth it.
• Keep an eye on your credit score. Check it regularly. If you notice any major fluctuations, be proactive. Investigate the cause.
• Consolidate your debts. You can get out of the hole more quickly by combining two or more debts into one more affordable payment at a lower interest rate. Done right, a debt consolidation loan saves you money.