Credit Card Charge-Offs Can Seriously Hurt Your Credit. Here’s the Best Way to Deal With Them

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Americans had a total of $790 billion in credit card debt in 2021, according to a report from the Federal Reserve Bank of New York’s Center for Microeconomic Data, and 9.3% of that debt is more than 90 days delinquent. 

While debt is not uncommon, it can be a slippery slope. Failure to repay your debts can lead to a number of serious penalties and consequences, many of which have a direct impact on your credit score. If you fall months behind on your debt payments, you could face something called an account charge-off — in which your issuer or lender closes your card account because they don’t believe they’ll be able to recoup the debt you owe. 

An account charge-off can seriously damage your credit score and potentially result in calls from debt collection agencies or even legal action. Here’s what you should know about charge-offs, how they can affect your finances, and what to do if you receive one. 

What Is a Charge-Off?

“A charge-off is the closure of your credit account due to prolonged delinquency,” says Leslie Tayne, head attorney and founder of Tayne Law Group, a New York-based firm that specializes in debt relief. 

Charge-offs occur when a lender repeatedly attempts to settle an unpaid debt with a borrower, but is unable to do so. You can think of a charge-off as a last resort option for the lender. At some point, the lender gives up and accepts that the borrower can’t — or won’t — make any more payments towards their debt.

Pro Tip

A charge-off means your debt has been written off by your lender. However, you’re still responsible for repaying it.

Charge-offs typically show up on your credit report after six months of non-payment and unsuccessful attempts at settling the debt, Tayne explains. Charge-offs may be issued for credit cards, an auto loan, a personal loan, a mortgage, or any other type of borrowed money.

How to Know if You’ve Received a Charge-Off

Your lenders should notify you when they charge off your account. 

“When one of your accounts gets listed as a charge-off, you’ll generally receive communication via mail from the creditor,” says Tayne. “You can also see the charge-off on your credit report.”

But charge-offs aren’t sudden, and should not come as a surprise. Having a credit card charge-off means that your lender has attempted to reach out and settle your debt for at least six months.

If you see a charge-off on your credit report, you should contact your lending company immediately. You may be able to negotiate with the lender to have the charge-off removed from your credit report, assuming you can repay the debt promptly.

How Will a Charge-Off Affect Your Credit Score?

Your credit score is a direct reflection of your financial habits. That’s why people who pay their bills on time and don’t carry a balance from month to month typically have good credit. Having a charge-off on your account is one of the biggest financial missteps, so it will have a major impact on your credit score.

“A charge-off can cause lasting damage to your credit score, as it takes up to seven years for it to fall off of your credit report,” according to Tayne. “However, your score will likely start to dip the moment you miss a payment, and continue to go down with each passing month that you don’t pay,” she adds.

By the time you receive a charge-off, your credit score may have already dropped significantly. Even if you repay the debt, the delinquency will remain on your report for the next seven years.

Difference Between a Charge-Off and Collections

Most people are familiar with debt collections, which is related to charge-offs, but is not the same thing. In short, debt collection happens after your account has already been charged-off.

“Debt collections differ from charge-offs in that the original lender has sold the debt to a third-party agency to collect the debt from the borrower,” says Annette Harris, founder of Harris Financial Coaching. “When your debt gets sent to collections, it means the debt is no longer able to be settled with the original lender,” she says.

When your debt is charged-off, it’s considered bad debt. Your lending company can sell your unpaid debt to a collection agency or a private debt collector to recoup the money they have lost on your loan.

Once your debt has been sent to collections, the agency will attempt to get the money back from you, just as your original lender did. The difference is, if you choose to ignore the debt collector, they can file a lawsuit and take you to court. If you still refuse to pay, the court can legally seize your assets, like your house or savings account, as a form of repayment.

Not only can debt collectors take legal action against you, but having your debt sent to collections can potentially ruin your credit. If you repay the debt after it goes to collections, the collections account, too, will remain on your credit report for seven years.

If you start getting calls from a debt collector, don’t ignore them. It’s in your best interest to repay the debt, or else you could wind up in a costly lawsuit. If you don’t have the money available, the collection agency may offer a payment plan to help you pay it off overtime. 

When dealing with debt collectors, be sure to know your rights. Under the Fair Debt Collection Practices Act (FDCPA), debt collectors are not allowed to harass you or use deceptive, false, or misleading methods to collect the debt. If you think your rights have been violated, you can file a complaint with the Consumer Financial Protection Bureau (CFPB) or your state’s consumer protection office

Given the prevalence of debt collection scams, always check that the debt collection agency is legitimate and ask for a written validation notice of your debt before giving out any personal information. It’s also a good idea to keep records of any calls or correspondence you receive in case you later need to reference that information or file a complaint.

If you need assistance dealing with debt collectors or managing debt, a non-profit credit counseling agency may be able to provide you with personalized advice and guidance for free or at a low cost. 

Should You Pay Off Charged-Off Accounts?

One of the biggest misconceptions about charged-off accounts is that the debt disappears and you get off the hook. However, you are still fully responsible for repaying charged-off debt, even if your lender doesn’t expect to get the money back.

“Legally, borrowers still owe the balance when an account is charged-off,” says Harris. “Settling the debt with the original lender can stop the account from going into collections,” she adds.

While you are required to pay off charged-off accounts, you can choose the strategy and timeline. “You should make sure you can cover your current expenses (including other debt payments) before paying off a charge-off account. The last thing you need is to get behind on more bills or take on more debt,” says Tayne.

Once you start making regular payments, your credit score will start to improve. However, the charge-off will still appear on your credit report for seven years. To continue improving your credit, make sure to pay your other bills on-time (ideally in full), limit your credit usage, and avoid opening too many new credit accounts.

Owing money that you can’t immediately repay can be stressful. Fortunately, there are plenty of ways to get out of debt. Here are a few tips: