When you use your credit card, you agree to pay the minimum credit card payment each month. If you don’t make your minimum payment, several things happen. The credit card company charges you a late fee, possibly raises your interest rate, and reports your late payment to the credit bureau.
How Credit Card Charge-offs Happen
Late payment entries on your credit report progress in 30-day increments. So, one late payment is 30-days late; two late payments are 60-days late. Once your credit card reaches 180 days late, you’ve missed six credit card payments.
As long as your account is current, credit card companies consider your balance to be an asset to the company. However, when you reach 180 days late, your debt is now considered a liability for your credit card issuer. As an accounting practice, the credit card company writes off your debt on their books and calls it a charge-off.
The charge-off listing is added to your credit report, letting future creditors and lenders know your debt got so late the credit card company had to write it off.
A charge-off is one of the worst things that can appear on your credit report. It will devastate your credit score and can take years to repay.
You Must Pay a Charge-Off
Even though the word “charge-off” sounds like you’ve been forgiven for the debt, that’s not the case. You owe a credit card charge-off just like you owe your current credit card balances. Once your account has been charged-off though, your credit card company may not spend anymore time trying to get you to pay the debt. Instead it will hire a third-party debt collector to work on getting you to pay.
Charge-Off Listings Affect Your Credit Report and Credit Score
A charge-off will remain on your credit report for seven years and 180 days from the time your account first went delinquent. Even if you pay off the charge-off, your credit report will still reflect the fact that your account was once charged-off. The only thing that makes it better is that it becomes a Paid charge-off rather than an unpaid one.
It is difficult to get a charge-off removed from your credit report. You may be able to negotiate with the credit card company to remove the charge-off listing in exchange for payment. But, the credit card company has little incentive to agree to this. Not only that, credit card companies have an agreement with the credit bureaus to provide accurate information about your accounts.
The glimmer of hope is that some consumers have been able to work with their credit card issuers to remove the charge-off if they paid the account. It’s a matter of talking to the right person at the right time.
Settling Charged-Off Credit Card
If you can’t convince the creditor to remove the charge-off, consider negotiating a lower payment amount. This is called “settling your debt.” When you settle a credit card account, your creditor agrees to accept a lower payment to satisfy the debt. From the credit card company’s perspective, something is better than nothing. For you, it means you part with less money than you actually owe.
Be careful about settling a credit card charge-off. Your credit card issuer is required to let the IRS know about any debt above $600 that’s cancelled. In turn, you’re required to report the cancelled debt as income on your next tax return. That could mean you owe taxes or receive a lower refund than you would have otherwise.
If you settle a charge-off, your credit report will be updated to show the account was settled rather than paid in full. This could hurt your credit score as long as it appears on your credit report. Fortunately, the negative entry will fall off after seven years from the date the account was charged off.
Benefits of Paying as Charge-Off
Whether you pay a charge-off in full or you settle the account, you shouldn’t leave the charge-off unpaid. If you don’t pay a charge-off, it can impact your ability to get credit cards and loans in the future. That means you’ll have difficulty purchasing a house or a car. Not only that, you could pay higher insurance rates, be turned down for a job or promotion, and you could even have difficulty renting an apartment.
Once the charge-off is paid, collection efforts on the account will stop. You don’t have to worry about getting calls and letters from debt collectors.
How to Avoid a Credit Card Charge-Off
You can avoid a charge-off by making at least the minimum payment on your credit card each month. Make sure you let your credit card issuer know your current mailing address so you receive your billing statements in time to make your payment. Or, if your credit card issuer has the option, you can sign up for paperless billing.
If you notice you have trouble making your credit card payments, contact your credit card issuer ahead of time. Your card issuer may offer a hardship program that lowers your interest rate or monthly payments to make your payments more affordable. Or, you may take advantage of consumer credit counseling which will help you negotiate a lower interest rate or minimum payment if your card issuer doesn’t have a hardship program.
Avoid using cash advances, balance transfers, and payday loans to pay your credit card bills because create more credit card problems than the charge-off itself.
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