Sense & Centsibility Blog

Charge-Offs: What They Are and How to Prevent Them

A charge-off is one of the worst marks you can have on your credit report. It basically means that you have fallen so far behind on your monthly payments that the creditor considers it highly unlikely they will ever get paid back. Creditors charge off the debt in order to write it off and claim a tax exemption. In the past, it has been common for creditors to charge off accounts after 180 days (6 months) without payment. More recently, some creditors are choosing to charge off debts at 120 days (4 months) - and sometimes even earlier.

Why prevent charge-offs?

After a credit card balance charges off, it is no longer considered a "revolving" debt. It is now a balance that is due in full. It is in your best interest to avoid charge-off status if at all possible because when an account is revolving, you still have the option of bringing it back into good standing. If you pay the amount due now, the debt will reflect as current again on your credit report. Once a debt charges off, it is no longer fixable.

Yes, you still owe the balance when a debt charges off!

A charge off will remain on your credit report for 7 years regardless if you pay off the balance or not. Just because the bank writes off the debt, it does not mean you are no longer obligated to repay the debt. This is a common misunderstanding made by consumers dealing with charged off accounts. The truth is that a creditor has the right to pursue collection even after they write off the debt. They might attempt to collect the debt internally or hire an outside agency. They could also sell the debt to an outside collection agency for pennies on the dollar. This is why it is so important to get the facts about a collection debt before you send any money. You need to find out who owns the debt and to whom you should send your payment. Sometimes, you will be paying the original creditor while other times you'll pay the collection agency.

So, what can you do if you are currently struggling to juggle your credit card payments and you want to minimize the amount of damage to your credit score?

Get creative

Making credit card payments on time accounts for around 35% of your overall credit score and not all late payments impact your score the same. For example, if you fall behind 30-60 days, your credit score will drop significantly in the months the late payments were reported. However, if you make at least a minimum payment to avoid falling behind another month (to 90 days) and you are eventually able to bring the account back to a current status, your score will improve as time passes. Ninety-day late payments (3 months without a payment), are more harmful to your credit score - especially if you've had an account fall 90 days behind within the last 24 months.

Learn the language of debt collection

So, if you know you will not be able to afford all of your credit card payments this month or you are already a month or two behind, contact your creditor to find out how far behind you are on payments and when the account is due to charge off. Ask them what the "now due amount" is on the account. This is the amount required to bring your account back to a current status. If you are unable to pay that full "now due amount" then ask the creditor what is the least amount you can pay now to stop the account from cycling to the next month of delinquency. Don’t just assume you know what the minimum payment is, because if you pay even a few dollars less than the minimum due, your account could cycle to the next month of delinquency anyway.

Pay smart

Keep in mind that a minimum payment might not bring your debt balance down very much, and you will still be charged late fees and interest. The purpose of paying at least a minimum payment when you are already 2 or more months behind is to stop the account from cycling to the next month of delinquency and avoid severely damaging your credit score. A minimum payment can prevent accounts from getting worse until you are in a financial position to make it better. To maintain good credit, one of the best things you can do is prevent your accounts from getting charged off - and the information above can help with that. If you already have a charged off debt, don't give up hope - there is help available. Financial Counselors as LSS can help you create a budget and plan to conquer your debt. Give us a call today at 1-888-577-2227 to schedule a free appointment or START ONLINE COUNSELING now.

Author Mary McKeague is a Certified Financial Counselor with LSS and specializes in budget and debt counseling.