While on the surface of it, a credit card charge-off sounds similar to debt forgiveness, it is an entirely different prospect that is simply for accounting purposes on the lender’s balance sheet. The charge-off will be heavily detrimental to your relationship with lenders but there are some steps you can take to remedy the situation.
A credit card charge-off involves effacing a credit card debt from a creditors balance sheet because it is in serious delinquency. If you have failed to pay the minimum monthly payment on your loan for 180 days, the credit card issuer will charge off your account, meaning that they no longer consider your loan to be an asset but a loss. A credit charge-off has several effects on your account but most importantly, it does not mean your debt is forgiven. In this article we will look at some of these effects as regards to the debt itself and your credit rating, as well as some tips to mitigate the damage.
Effect on the debt itself
First off, you should remember that getting a credit card charge-off does not mean you stop owing the creditor. It may be tempting to ignore the balance after a charge-off, but the debt will remain your responsibility until you have either paid, settled or gone into bankruptcy. The creditor will lock your credit card and you will not be able to continue making any more purchases with it. In most cases, the late charges and potentially interest rates will stop being charged on the debt. However, the credit card issuer will continue trying to collect the debt using a variety of means. The most common way is for the lender to pass the debt to a third party collection agency. This is when most people realize that they have a charge-off because the collector will get in touch with them.
Effects on your credit score
This should be up there with your most serious concerns regarding credit card charge-offs. Immediately your payment is late by 30 days, most credit card issuers will notify credit bureaus, meaning that by the time you are getting a charge-off, your credit score is already down a few points. When the bank gives you the charge-off, the record is passed on to the bureau where it does detrimental damage to your credit rating. As much as 100 points can be shaven off your credit score, and on top of that, the record will stay on your credit report for seven years. If the bank sells your debt to a collection agency, the latter might report it as a new credit line with the credit bureau and further failure to remit payments will continue to affect your credit report. Such a credit report is very problematic when trying to get loans and credit cards going forward. Even after you have paid the balance, the charge-off entry on your credit report will continue to stick out to potential lenders.
Aftermath of a credit charge-off
Recovering your credit status after a charge-off can be daunting but not impossible. Your best strategy is to avoid a charge-off altogether by talking to the lender if you anticipate difficulty keeping up with credit card payments. However, once the charge-off has happened, your efforts should center around repaying the balance and maintaining a clean record. On the rare occasion, it is possible for the credit card issuer to have the charge-off wiped from your credit report. The most hopeful way to do this is by negotiating with the original lender. This is especially effective if your financial difficulties were from unfortunate occurrences like medical emergencies or natural disasters.
For very dire circumstances, you may consider a debt management program, credit counselling or even bankruptcy. These avenues not only give you leeway to bring your financial affairs in order but also rely on professionals such as debt attorneys who are experienced in negotiating with financial institutions. Finally, the surest way for your credit to bounce back is through patient diligence in credit utilization and repaying outstanding balances. Ensure to remit all your payments on your debts on time and only take on credit when it is really needed. Some other mistakes that may keep your credit score down include triggering hard enquiries on your credit rating through applying for too many loans, and canceling zero balance credit cards. These practices are best avoided after a charge-off.
1. http://www.canadadebthelp.com/credit-reports/charge-offs/ 2. https://www.wisebread.com/what-happens-when-your-credit-card-debt-is-charged-off 3. https://www.discover.com/credit-cards/resources/credit-card-charge-off/ 4. https://www.nerdwallet.com/blog/finance/credit-card-debt-charged-off/ 5. https://www.creditkarma.com/advice/i/what-is-a-charge-off/ 6. https://www.thebalance.com/what-is-a-credit-card-charge-off-960409