Keeping Score

What is a charge-off, and how does it affect your credit?

A charge-off is an unpaid debt that your bank has written off its books. And it’s a credit score killer


A charge-off is an uncollected credit card balance that has been overdue so long it is removed from a bank’s books and charged against its loss reserves. Its credit score damage can be significant, and long-lasting.

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There are very few of us who have not missed or forgotten about a payment at least once and sometimes more than that.

But there are times in our financial lives when things take a nose dive for any number of valid (to us but not our creditors) reasons and we come to a significant turning point where things can get serious. It’s important for you to recognize when you’re in this position, how much damage you’re likely to incur to your credit and what comes next.

One of the most damaging credit score consequences of falling behind on payments is what’s known as a charge-off.

See related: 8 things you must know about credit card debt

What is a charge-off?

A charge-off is an uncollected credit card balance that has been overdue so long it is removed from a bank’s books and charged against its loss reserves. For the card issuer, this means it has decided that your debt is unlikely to be collected, so it “charges” the debt off its books.

I assure you there is not a dry eye in the accounting department when that happens. This is partially because the bean counters hate to see any money disappear, and partially because their boss just chewed them out about the loss and told them to go collect the money!

Yes, debts charged off are still debts that are due, owed, accruing interest and penalties and, most importantly, collectible.

Check out all the answers from our credit card experts.

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How does a charge-off affect your credit score?

Having a debt charged off is the next most serious derogatory item on your credit report and score next to a bankruptcy.

There are two types of charge-offs that may appear on your credit report. These are paid and unpaid charge offs. As the next-to-most serious indicator of not paying your bills on time and as agreed, the charge off notation hits your credit score hard in the payment history and amounts owed categories.

Depending on how much positive data you’ve accumulated in your credit file over the years you could be looking at a significant credit score drop. Paying your bills on time, every single time means never having to worry about terms like charge offs because that only happens if you don’t pay your bills.

This is not to say that you risk a charge-off if you are late or even miss a couple of payments. You could definitely risk damaging your score if you do that, but it generally takes longer for a charge-off to happen.

Note that the definition I quoted from above says balances have been overdue for a long enough period of time that the bank has decided they are never going to get paid. This most often happens when your account falls 180 days past due. That means at least six months of consistently not paying on a bill.

In reality, it’s sometimes more like seven or eight months because you generally aren’t reported delinquent the first time until you are at least 30 days past due. While forgetting a payment one month might be understandable, that logic won’t hold up over the long haul. When you get into the two or three-month range, there is obviously a problem that you need to address.

What happens after an unpaid debt gets charged off?

At that point (if not before) your creditor will certainly reach out to you find out what is going on and when they can expect a payment from you. If you don’t have an answer, you may be embarrassed and it may be tempting to just ignore or dodge those attempts from your creditor. This is not a temptation that you should give in to. Things will only go from bad to worse if you do.

What’s worse, you ask? Well, if your creditor finds you unresponsive, there is a good chance that your debt will be placed with or sold to a third-party professional collector. If you think calls from the original creditor are aggressive, you’ll see how much more it will be with collection efforts by professionals who do it every day.

Here’s why: initially the creditor is trying to get in touch with you to help. They may have programs, reduced pay options and more to help a customer who they want to keep. When a collection agency buys a debt you no longer are a valued customer they are trying to keep, but a liability that needs to be turned into a cash cow.

Of course, there are protections against harassment from a creditor and third-party collector in the Fair Debt Collections Act. This includes excessive phone calls, false threats and abusive language.

You have the option to tell the collector you don’t want to be contacted again about this debt. They are bound by law to stop the calls and letters. However, what most will do then is to immediately send your file to their legal department for court action.

It’s important to understand that just because a debt is charged off, it does absolutely nothing to release you from your obligation to pay your debt. If you don’t pay, you could eventually be sued in court for the amount you owe. And if you choose to ignore a court summons, you will lose automatically.

At that point, you could face a judgment that might even garnish your wages depending on the laws in the state in which you reside.

See related: Can my stimulus check be garnished?

How long does a charge-off stay on your credit report?

You should also know that a charge-off remains on your credit report for seven years. This is true even if you eventually pay off the debt.

I will tell you that a credit report notation of “charge-off paid” will make your mistake look somewhat better to future lenders. It shows you had a problem, probably a serious one, but that you eventually honored your commitment.

What paying a charge-off won’t do is raise your score a lot. Time will help blunt the charge-off’s impact, but paying the bill doesn’t change that you are a risk for lending. No one wants to wait six months or more to get paid on a debt that was supposed to have been paid as agreed.

See related: How long does it take to improve your credit score?

Bottom line

A charge-off is a direct result of not paying a bill. That is going to cause your credit score to drop. And the charge-off is a major insult to your credit report that will last for seven long years.

As with everything when it comes to credit reporting, instituting good credit practices moving forward is the best thing you can do to mitigate the amount of damage done.

Remember to keep track of your score!

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The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

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