A charge-off occurs when a credit card issuer declares your unpaid debt a loss after you've missed payments for 180 days. The account is closed, and the debt may be sold to a collection agency.
When you stop making payments on a credit card, the issuer typically reports the delinquency to credit bureaus after 30 days. After six months (180 days) of nonpayment, they may charge off the debt. This doesn't erase the debt-you still owe the money, but the account is closed, and the debt may be transferred to collections.
| Type | Description |
|---|---|
| Credit Card Charge-Off | Most common type, occurs when a credit card issuer writes off unpaid debt. |
| Loan Charge-Off | Similar process but applies to personal loans, auto loans, or mortgages. |
Charge-offs typically result from financial hardship, job loss, or overspending. Once a charge-off occurs, the lender may sell the debt to a collection agency, which then attempts to recover the money. You may receive calls or letters from collectors seeking payment.
Many people believe a charge-off means the debt is canceled. However, you still legally owe the money. Another myth is that charge-offs only stay on your credit report for seven years. While this is true, the damage to your credit score can linger much longer.
If you have a charge-off, consider negotiating a settlement with the collection agency. Paying a portion of the debt may improve your credit score. Alternatively, you can dispute the charge-off if it's inaccurate. According to the Consumer Financial Protection Bureau, disputing errors on your credit report is important for maintaining accurate credit history.
I once helped a friend negotiate a charge-off by offering a lump-sum payment of 50% of the debt. The collection agency accepted, and his credit score improved within months. This strategy can work if you're proactive.
Charge-offs severely impact your credit score, making it harder to qualify for loans or credit cards. They remain on your credit report for seven years from the date of the first missed payment. Even after they drop off, the negative impact may still affect your creditworthiness.