Here's What Happens When Your Credit Card Gets Charged Off

Household debt has been on the rise for 20 consecutive quarters. According to the most recent report from the Federal Reserve Bank of New York, U.S. household debt hit a record $13.86 trillion in the second quarter of 2019. Credit card debt accounts for around $870 billion of this outstanding debt.

In some cases, the high interest rates that often accompany credit card debt can make it difficult for borrowers to pay their bills, ultimately resulting in a credit card charge-off. If you’re behind on payments, here’s what you need to know about charge-offs and how they impact your credit.

What is a credit card charge-off?

If you’re seriously delinquent on your credit card payments, a creditor can charge off the debt. A credit card charge-off happens when a creditor basically gives up on collecting the debt, writes it off as bad debt for tax purposes, and sells it to a collector.

Credit card charge-offs show up as a delinquency and could stay on your credit report for a long time. They don't absolve you of your obligations to pay your debt back either — you'll still hear from debt collectors.

It's important to understand both what happens when your credit card gets charged off and what you can do to mitigate the impact.

What happens if your credit charge gets charged off?

Credit card charge-offs happen when payments on a credit card are so far behind that the creditor decides collecting what you owe is unlikely.

Usually, a charge-off happens once your card has been delinquent for 120 to 180 days. During that time, you'll probably receive collection calls from your card issuer. However, the card company doesn't have to notify you before officially charging off your debt.

When creditors start contacting you, you may be able to find a solution that allows you to avoid a charge-off. It's always best to be proactive and alert your creditor as soon as you know you can't pay your bills. Your card issuer may be willing to work with you on a payment plan or settle your debt for less than you owe — and it's worth asking to try to avoid a charge-off.

Sometimes, however, a charge-off becomes inevitable because you can't pay your bills. When your debt is charged off:

1. The card issuer closes your account and notifies the credit reporting agencies of the delinquent debt.
2. Usually, the debt is then sold to a collections agency — so you still have to pay it, but you'll likely be paying someone else rather than the original creditor.
3. Debt collectors who buy your charged off debt from the card issuer may take several steps to try to collect from you, including potentially bringing legal action against you.

It's important to know that you do have rights under the Fair Debt Collection Practices Act, so debt collectors cannot:

• Threaten you
• Harass you
• Call you at work if you ask them not to
• Call you very early in the morning or late at night

How does a credit card charge-off affect your credit?

Credit card charge-offs can negatively impact your credit, but the damage typically starts long before the actual charge-off. That's because creditors typically start reporting missed payments once you're 30 days behind.

According to FICO, a payment that's just 30 days late could reduce your credit score by more than 80 points, and a payment that's 90 days late could send your score tumbling by 130 points. You'll have multiple missed payments on your report before you even get to the charge-off phase, so your credit score might sustain serious damage.

Once the charge-off actually happens, the account will be moved from the "Accounts in Good Standing" section of your credit report to a separate section for "Negative Accounts" or "Negative Items." This lowers your score even further, and it can also impact your ability to get a loan in the future.

How long does a charge-off stay on your credit report?

A charge-off can impact your finances far into the future. It will remain on your credit report for seven years, and so will the missed payments prior to the charge-off.

While this black mark will undoubtedly affect your credit report — and impact how lenders view you as a borrower — there’s some good news. The older the negative information on your credit report is, the less of an impact it may have.

This means if you have a debt charged off but you have years of responsible borrowing behavior after that, your credit will slowly begin to recover. So if you're able to find ways to manage your credit card debt and fulfill your financial obligations responsibly, your credit can improve over time.

How do you remove a credit card charge-off?

Once a credit card has been charged off, you may not be able to remove the charge-off from your credit record.

Disputing a credit card charge-off

You could dispute an inaccurate report of a charge-off. If the credit reporting agencies find you didn't actually fail to pay your debt, it would be taken off your report. But when the charge-off actually happened, card issuers have no obligation to remove it. In some cases, however, convincing the card issuer to remove the black mark from your credit report may be possible — if you can negotiate a deal.

Deal with the original creditor

First and foremost, you need to deal with the original creditor that’s reporting the charge-off. If the card issuer sold the debt to a collections agency, negotiating with that agency isn't going to get the charge-off removed from your report. The collections agency has the legal right to collect the debt but no legal authority to change what the original card issuer reports about it to credit reporting agencies.

The original creditor, on the other hand, could agree to remove the report of the charge-off from your credit report and may do so if you come to an agreement to pay your bill. You can call up your creditor and ask if it might be willing to remove the derogatory details from your credit history in exchange for a full or partial payment or entering into a payment plan.

Consider paying your bill in full

Typically, you have more negotiating leverage with the credit card issuer if you’re able to pay the bill in full and get out of debt — so consider trying to line up a side gig, refinance credit card debt to lower monthly payments or find other sources of extra income so you can repay all that you owe.

And before you actually submit your payment, make sure you get the agreement in writing so you can prove the card issuer agreed to remove the report of the charge-off. Otherwise, you might find that you've paid the bill, but the charge-off still shows up on your credit history.

Charge offs hurt your credit — but aren't the end of the world

A credit card charge-off is definitely bad news for your credit, but sometimes financial struggles make charge-offs inevitable.

The good news is that you can sometimes get a charge-off removed — and even if you can't, you can rebuild your credit over time. So while you should try to avoid a charge-off by talking to your creditors as soon as you can't make payments, you shouldn't let a charge-off cause too much financial stress. Always remember: There are ways to bounce back, even if you’ve struggled with how to pay off debt in the past.