Credit card users are essentially receiving loans from a bank. And like any loan, cardholders are expected to repay their bank including the appropriate interest.
But what happens when a customer fails to do so? Eventually, the bank must declare that debt to be uncollectable, a process known as a credit card charge off.
What charge offs mean for cardholders
Federal regulations require that banks charge off any revolving debt that has gone unpaid for 180 days. This has to do with the bank’s ability to deduct unpaid debts from their tax statements.
Nevertheless, this debt is still valid and cardholders still have an obligation to repay it.
To collect this credit card charge off debt, banks can sell it to professional debt collectors or debt collection attorneys. These entities can continue to pursue collection for years into the future.
How credit card charge offs affect a credit score
Having a debt charged off is one of the most negative events that can affect a credit score. Each time a payment is 30, 60, or 90 days late, the consequences become progressively more severe.
According to the FICO credit scoring formula, the most damaging event that can affect a credit score is a credit card charge off, which means that a debt has gone uncollected for 180 days, nearly half of year.
How to mitigate the damage
The most important thing to do is to prevent a debt from becoming a charge off. Cardholders need to make sure that their bank always has their correct address, and customers should always read all correspondence.
[pull_quote align=”left”]If a cardholder if unable to pay back a debt, it is essential that they reach out to the bank to explain the problem. The sooner a cardholder is able to start repaying the debt, the less damage will be done to a credit score.[/pull_quote]If a cardholder is unable to pay back a debt, it is essential that they reach out to the bank to explain the problem. The sooner a cardholder is able to start repaying the debt, the less damage will be done to a credit score.
In addition, banks are eager to work with cardholders to avoid debt being charged off. In some circumstances, banks can offer payment plans or special financing terms.
Once debt has been charged off, it is not too late to take some action to lessen the damage. At this point cardholders should request that the credit card charge off be removed from their credit report in exchange for debt repayment.
Long-term affects of a charge off
If no action is taken to have it removed, a credit card charge off will remain on a cardholder’s credit report for as long seven years.
During this time, the cardholder’s credit score will be far lower than it would have been otherwise. This will affect a person’s access to credit, increase insurance costs, and can even hurt their ability to get a job that requires a pre-employment background check.
By staying on top of outstanding debt, and working with creditors to make payments, cardholders can avoid the severe consequences of having a debt charged off. This is one area of finance that cardholders have control over, and it is important that they make the right decisions to protect their credit score.
