Understanding Credit Cards and Charge Offs

Sometimes, consumers get into credit card partly due to misconceptions and misunderstandings about what falling into arrears really means. The resolution of credit card debt that results in a “charge off” is a primary example. “Charge off” is an accounting term that creditors use when they assume, after a period of delinquency, that they are not able to collect on a debt that is owed to them. Creditors write that debt off as a loss against their income taxes. Just because a debt is charged off (or written off) does not mean the debt is forgiven. The money is still owed. The creditor will usually sell or assign the debt to a collection agency or a lawyer to enforce collection.

In some situations, companies continue to charge interest, but many do not. If they do decide to keep charging interest, they will continue to report it as income. Most companies, however, would rather just write it off and be done with it.

Charge offs appearing on your credit report usually results in being denied credit by other lenders. Even worse, it can also affect the interest rate that other lenders charge on current debts, even if those lenders were not affected by the charge off themselves.

If you find yourself late on payments, you should always try to contact the lender and let them know you are having problems meeting your financial obligations. Ignoring the situation and allowing it to reach charge off status always makes the situation worse. You can usually avoid your account being charged off by at least informing them that you intend to pay and by at least making small payments as frequently as you can.

If you already have charge offs on your credit report, it is possible to have them deleted. You can try to contact the original creditor and arrange a payment plan in exchange for removal of the charge off, once it is paid. It is a good idea to ask them how it can be resolved or removed. You can also challenge it with the three major credit bureaus.

It is much easier to get a paid charge off removed from your credit report than it is with an unpaid charge off. When you dispute the charge off with the credit bureaus, they have 30 days to verify the account with the creditor. If the account is paid, the creditor will just ignore the verification request. They only report a charge off so that they can impact your credit, hoping that it will in turn motivate you to pay them off. It is highly unlikely that they would ever ignore a dispute if you still owe money.

Creditors will usually write off or charge off a debt if there has been no payment on the account for more than 180 days (6 months). This does not mean that the person no longer owes the debt. A charge-off is an accounting procedure for tax purposes used by the creditor where an uncollectible debt or charge-off is reported as a loss for the creditor.

If you have any charge-offs on your credit reports, your ability to obtain credit will be affected and you must actively work to restore your credit. Charge-offs remain on your credit report for 7 years from the date of the initial, missed payment that led to the charge-off (the original delinquency date), even if payments are made later on the charged-off account.

Paying an old charge-off will not remove it from your credit reports. It will be updated to a “paid charge-off,” which, while slightly better, is still a seriously derogatory item. To qualify for some loans, including a mortgage loan, you must take care of any charge-offs that appear on your credit report.

To remove a charge-off from your credit report, you must dispute the account with the credit bureaus. If, after numerous disputes, the credit bureaus verify the account, you must contact the creditor or the collector. All negotiations should be in writing. It will be necessary to begin this process on the phone to determine the correct person with whom you should be negotiating. However, once you know who that person is, send everything in writing and request they do likewise.

Negotiate with the collection agency to remove their listing entirely from your report. A charge-off is negative, whether it is paid or not. Make sure you get this agreement in writing as well.