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What Is a Credit Card Charge Off?

When you hear the term "credit card charge off," you might think it means the creditor has given up on being paid and you no longer owe any money. On the contrary, a credit card charge off means you are more than 180 days late on your payment and the credit issuer considers the debt uncollectible. As for having to pay it back, you're not going to get off that easily.

Credit card charge offs are on the rise in recent months. According to the Federal Reserve, the credit card charge-off rate rose to more than 3.8% in the first quarter of 2019, the highest level since 2012.

Though increasingly common, a credit card charge off is not something you want to ever appear on your credit report. Here's a closer look at what credit card charge offs are all about and the impact they can have on your financial life.

[Read: Best Starter Credit Cards for Building Credit.]

What Triggers a Charge Off

While missing a credit card payment can be an easy mistake, having a debt charged off isn't something that comes out of left field.

"The normal policy (of major credit issuers) is to send you notices and try to keep you informed of the amounts you owe, and the interest and late fees that are being added to that balance," says Sean Stein Smith, certified public accountant and a member of the National CPA Financial Literacy Commission of the American Institute of CPAs.

In other words, it's nearly impossible to forget about a bill for six months since you'll probably hear from the creditor by mail, phone, email or text.

However, after 180 days, the credit issuer will likely make the assumption that you're not going to pay them the debt owed. That's when the creditor alerts the credit reporting agencies that the debt is charged off as bad debt, says Leslie H. Tayne, financial attorney and author of money management book "Life & Debt." "They are writing it off their books as an ongoing, collectible debt."

What Does a Charge Off Mean for You?

It's a common misunderstanding that if your debt is charged off, you're off the hook from paying it, Stein Smith says. "That is untrue. You still owe the full amount."

You, as a debtor, are still responsible for any amounts that you owe, Tayne says. The only difference is once it's charged off, you might have to pay a third party, such as a collection agency, or deal with the credit issuer's internal collections department, rather than pay through regular channels.

"It really depends on the creditor's policy and procedure when it comes to charged-off debt," Tayne says.

Rest assured that if the charged-off balance is sent to a third-party agency, you can expect that the agency will be pretty proactive about trying to get a hold of you, Stein Smith says. And since no one enjoys getting aggressive collection agency calls, charged-off debt is only going to make life more stressful.

[Read: Best Credit Cards for Bad Credit.]

How Charged-Off Accounts Affect Your Credit

One of the biggest sources of charged-off debt stress is what it can do to your credit score. While a charge off is particularly damaging, the string of late payments leading to the charge off will also negatively affect your credit.

As soon as the credit bureaus receive word that your payment is more than 30 days late, your credit score will take its first hit. From there, your score will incrementally keep dropping at 60 days, 90 days -- every billing cycle your nonpayment is reported, Stein Smith says. "The cherry on top is if this debt is labeled as a charge off, it can have an additional negative impact on your score."

What's more, a credit card charge off can remain on your credit report for seven years. What that means is that you'll have a red flag on your report that says to current and future institutions that you failed to meet your obligations for at least six months.

Tayne says, "That charge off will go on your credit report, not just as a delinquency, but as a bad debt, essentially." If you do resolve the debt, the impact on your credit will lessen over time, but the charge off will still remain on your report, she adds.

You might think, "What's the big deal?" But Stein Smith explains that big drops in your credit score could have a ripple effect on all aspects of your finances for the foreseeable future.

"People often think of the credit score in the context of getting approved for credit cards, but it's used to evaluate you for pretty much every financial product out there," he says. That includes mortgages, auto loans and student loans.

Credit affects not only getting approved for those products but also the interest rates you'll pay. And that can translate into paying thousands of dollars more in interest.

"That's why it's important to be proactive in ensuring you're doing everything possible to keep your credit as healthy as you can," Stein Smith says.

Other Charge Off Consequences

Beyond a stain on your credit report, a charged-off debt could also turn into a lawsuit, Tayne says. State laws vary as to how long a creditor has to collect a debt -- the statute of limitations can be anywhere from three to 15 years -- but it's not the sort of situation you want to find yourself in.

Should that happen, you'll be notified with a summons, and you will have 30 days to respond and either pay the debt or argue your case. If you don't respond within that time period, the court may grant a default judgment and enforce garnishment of your wages or bank account to pay the debt.

Avoiding a Charge Off

Ideally, you should be proactive about getting in touch with your credit card company before you're past due, says Stein Smith, or at least before one month late turns into several. "All of them have payment plan options and departments to help people who for one reason or another are having issues paying down their debts."

If you're in the midst of a financial hardship, you might also consider getting some advice from a professional, like a credit counselor referred through a nonprofit organization such as the National Foundation for Credit Counseling.

[Read: Best Credit Cards for Fair Credit.]

Dealing W

ith an Existing Charge Off

There's a lot of misinformation circulating about charge offs. Some people think you can just call a creditor and negotiate to remove the charge off, but that's not how it works, Tayne says.

"Unless something was reported erroneously or incorrectly, you are not going to be able to change reporting. What will change is if you resolve the debt, the creditor will update your credit report showing that your account was resolved," she says.

The bottom line: Do what you can to avoid credit card charge offs and the harm and potential legal headaches they can bring. If you are in over your head, reach out to your creditors before the debt reaches charge-off levels, or seek advice from a professional, like a credit counselor, who can help you explore solutions.



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