Why Credit Card Charge-Offs Happen — and What They Mean for You
A credit card charge-off means your credit score will likely decrease — and you still need to pay your debt.
June 15, 2022
As of early 2022, Americans had a collective $841 billion in credit card debt. So if you have a balance on your credit card, you certainly aren’t alone.
But when the worst happens, it’s possible to fall behind on your credit card payments, which can have a big impact on your personal finances. Whether it’s a job loss, medical emergency or the loss of a loved one, unexpected life events can make it tough to keep up with your credit card payments.
If you fall behind on your credit card payments for 180 days, the credit card company might send you a letter saying your unpaid debt is “charged off.”
Learn what a credit card charge-off is, how it affects your credit and what you can do to avoid one.
What is a credit card charge-off?
A charge-off is an action that your credit card company takes when you’ve missed a number of payments. This usually happens after the credit card company tries to get payment from you for several months and is unable to do so. In response, they may close your credit card account and file for a charge-off. This means that they consider your debt uncollectable.
But why do credit card companies file charge-offs? It’s a business strategy. By claiming a charge-off as “bad debt,” your credit card company is trying to get a tax break.
However, that doesn’t mean that you no longer owe the debt or that your troubles are over. All a charge-off means is that the credit card company doesn’t want to handle the debt directly — they’ll typically sell your debt to a collections agency.
Why charge-offs happen
As a cardholder, you’re required to make the minimum payment on your credit card every 30 days. Each late or missed payment will ding your credit. But if you reach the 180-day mark (six months) without making a minimum payment, your credit card company will likely file a charge-off.
To get a charge-off, your credit card account needs to be delinquent for 180 days. Charge-offs can also happen if you pay less than the minimum payment.
Why do credit card charge-offs matter?
It’s tempting to ignore a charge-off when the credit card company isn’t calling you about it, but it’s a good idea to understand your charge-off status.
Credit card charge-offs matter because payment history is a huge factor in determining your credit score. This means that your credit score takes a hit every time you miss a payment or receive a charge-off.
If your account is charged off, you’re still on the hook for the amount owed, but now you’ll also have to contend with a seven-year-long negative mark on your credit report. With a charge-off on your credit report, you could face problems like
Difficulty securing loans: Borrowers with a lower credit score can have a harder time securing loans and financing.
Higher interest rates: When you’re able to get financing, there’s a chance that lenders will charge higher interest rates because borrowers with lower credit scores are perceived as riskier.
Housing challenges: If you’re trying to buy a home, it can be harder to qualify for a mortgage with a lower credit score. Since landlords run credit checks, it can make renting an apartment more challenging, too.
Job security: Although this is illegal in some states, employers might run a limited credit check as a condition of employing you. This means that negative credit history could affect your ability to secure a job.
What to expect with a credit card charge-off
A credit card charge-off doesn’t mean that your debt is gone forever. It’s important to understand how a charge-off affects your finances so you can take steps to rebuild your financial well-being.
1. Your credit score will likely decrease
If your credit card company reported the charge-off to major credit bureaus (i.e., Equifax, Experian and TransUnion), the charge-off will appear on your credit report. Next, you’ll likely see a dip in your credit score because the credit scoring agencies (i.e., FICO and VantageScore) base your score on the information on your credit report.
A charge-off is considered negative information on your credit report. It tells lenders that you’ve had difficulty paying your debts in the past. Since lenders want to make their money back plus interest, they tend to be wary of consumers who have a history of missed payments.
The silver lining is, thanks to the Fair Credit Reporting Act, the charge-off will only remain on your credit report for seven years from your first late notice. However, if you pay your charged-off debt, it might have less of an effect on your score, even before the seven years are up.
2. You still need to pay your debt
Just because the credit card company reported your debt as uncollectable, it doesn’t mean you don’t owe that debt. This is a classification that affects the lender, not you. You’re still liable for the full amount of the credit card debt. The creditor is still allowed to try to collect on that debt until the statute of limitations expires. This is different for every state, but if you live in Texas, for example, the statute of limitations on credit card debt is four years.
Keep in mind that the longer you allow debt to sit in collections, the more dings you could see on your credit report. That’s why it’s a good idea to make a plan for tackling your charged-off debts.
3. You might have to work with a debt collection agency
Before the statute of limitations expires, you’ll likely hear from a third-party collections agency because credit card companies will often sell your debt to a collections agency, which pays the lender for the “rights” to your debt.
This means that you’ll need to work with the new debt collector, not your credit card company (or the original creditor), to address the charge-offs. Some collection agencies will take legal action against you if you ignore them, which can lead to the seizure of your car or other property.
If you’re working with a collections agency, remember that you have rights as a consumer. Because of the Fair Debt Collection Practices Act (FDCPA), collectors can’t harass or deceive you.
How to avoid credit card charge-offs
The only way to remove a credit card charge-off from your credit report without paying it is in cases of fraud or identity theft, but there are a few ways you can try to avoid charge-offs.
Make regular minimum payments
The best way to avoid credit card charge-offs is to regularly make payments on your debts. As long as you cover the minimum payment by your lender’s due date, you can avoid future charge-offs.
Consider credit counseling
Are you struggling with your debt or money management? Nonprofit agencies called credit counselors can help you create a plan to pay off the debt and avoid charge-offs. Many can help you through one-on-one assistance or workshops.
You can search for a reputable credit counseling nonprofit through the Financial Counseling Association of America.
Negotiate with the card issuer
Sometimes special circumstances, like illness or a job loss, can cause you to fall behind on your payments. Depending on your situation, you can try writing a letter to your lender if you can’t afford to pay your bill.
Some lenders might extend you extra grace on minimum payments or due dates. This is more likely if you’ve had an otherwise stellar borrowing history and your account’s in good standing.
While most lenders aren’t known for their flexibility, it’s good to communicate with them if you’re unable to pay. The more proactive you are, the easier it can be to avoid charge-offs.
Stay on top of credit card payments with Tally
Credit card charge-offs happen when borrowers are 180 days late on their credit card payments. They can also happen if a borrower pays less than the minimum payment required by the credit card company.
Charge-offs can hurt your credit score; they stay on your record for seven years. Borrowers should avoid charge-offs whenever possible by making regular minimum payments on time.
Are you having trouble keeping up with your credit card payments? Download the Tally†credit card payoff app. It automates your credit card payments and offers a lower-interest line of credit to pay down higher-interest credit card debt.
†To get the benefits of a Tally line of credit, you must qualify for and accept a Tally line of credit. The APR (which is the same as your interest rate) will be between 7.90% and 29.99% per year and will be based on your credit history. The APR will vary with the market based on the Prime Rate. Annual fees range from $0 - $300.