What is a charge-off on a credit card?

Falling behind on debt payments isn't ideal, but it can happen if you've hit a rough spot financially. When you're seriously past due on payments, your creditors might charge-off unpaid debts. 

Having charged-off debts on your credit reports can negatively impact your credit. Not to mention, the debt—and your responsibility for paying it—doesn't just go away. 

If you're facing charged-off accounts, you've got options. And once you know what you're dealing with, you can take the right steps to improve your financial situation. 

What is a charge-off?

A charge-off happens when a creditor decides that it is unlikely to be repaid on an outstanding debt. In other words, the original creditor has given up on trying to get you to pay. They may sell or assign the account to a third-party debt collection agency or department. Meanwhile, the creditor writes the debt off as a loss. 

When you open a credit card or take out a loan, the lender expects you to pay back what you borrow. If you stop making payments, the debt can eventually become delinquent. 

The creditor, which might be a credit card company or a lender, can contact you and ask you to pay the debt. But if they don't get anywhere with their requests, they might go ahead and charge off the debt. 

What happens when your credit card is charged-off?

When credit card issuers charge off debts, they can sell those accounts to debt collectors. That allows them to get back some of what's owed, even if they're not getting it from you.

The debt collector, meanwhile, can—and will—keep trying to get you to pay. Some of the tactics that collection agencies use include:

• Calling you to ask for payment

• Sending you written requests for payment

• Texting or emailing you to ask for payment

Now, there are some rules here. There’s a federal law called the Fair Debt Collection Practices Act (FDCPA). It sets the guidelines for what a debt collector can and can't do or say when trying to contact you about a debt. For example, debt collectors and collection agencies can't threaten to sue you if they don't really plan to file a claim. And they can’t harass you. The law defines harassment as any of the following:

• Using or threatening the use of violence to harm you, your reputation, or your property

• Using obscene or profane language to verbally abuse you

• Publishing your name on a list of consumers who allegedly refuse to pay debts to any unauthorized agencies or persons

• Trying to coerce you into paying the debt

• Calling you repeatedly with the intent to annoy, abuse, or otherwise harass you

• Calling you without disclosing who they are or why they're calling

Again, you can expect to get letters, phone calls, or texts from debt collectors. That's totally normal. But the rules say they can’t take it to extremes. 

The important thing to know is that charged-off debt doesn't disappear. You’re still responsible for it, and for a period of time, whoever owns that debt can try to collect it.

If enough time passes, you can't legally be sued for it. Each state has a statute of limitations on debt—a maximum number of years that a creditor can wait before they lose the right to sue you for the debt. The number of years depends on the type of debt and the state where you live. It could be anywhere from two to 15 years. It’s most often between three and six years.  

How does a charge-off affect your credit?

Charge-offs usually have a negative impact on your credit, which isn't great if you need to borrow money. You might have a harder time getting approved or be limited to more expensive kinds of loans. 

Credit scores are based on what's in your credit reports. There are three major bureaus that are responsible for credit reporting: Equifax, Experian, and TransUnion. 

FICO is the most widely-used credit score model in personal finance. FICO scores are based on five factors:

• Payment history - 35% of your score

• Credit utilization - 30% of your score

• Credit age - 15% of your score

• Credit mix - 10% of your score

• Credit inquiries - 10% of your score

So where do charged-off accounts fit in? The Payment History category, along with late payments, collection accounts, and accounts that were settled and not repaid in full. 

Negative payment information, including charge-offs, can stay on your credit reports for seven years. The clock starts ticking from the date the account first becomes delinquent, which can be anywhere from 30 to 120 days after you miss a payment. 

Once the seven-year period ends, the account will "fall off" your credit report. In the meantime, lenders might ask you to explain the charge-off if you're trying to apply for new loans or lines of credit. 

How to get charge-offs off your credit report

Here's one thing to know about charge-offs and credit reporting. If the information that's listed on your credit report is accurate, you can't have it removed, even if it's negative. 

If the same debt is reported multiple times, you can dispute it. It should only show up once. But for individual late payments, collections, and charge-offs, you may have to wait out the seven-year reporting period. 

If your credit report is a priority, you could still try a few strategies:

• Write a goodwill letter to the debt collector asking them to remove the item from your report. This may be more effective after you’ve paid the debt.

• Send a pay-for-delete request, where you offer to pay some or all of the debt in exchange for the removal of the account from your credit history. 

Do these tactics work? They might, if you're reaching out to a collection agency. However, the collection agency can’t wipe out any information reported by the original creditor, including the late payments that led up to the debt being charged off. 

What about credit repair companies, are they legit?

This is a good question, and the answer depends on which company you're working with. While there are legitimate credit repair companies out there, there’s also an abundance of scammers. Credit repair is about removing negative information from your credit reports. A legitimate credit repair company can't do anything for you that you can't do yourself. 

If your charge-off accounts are accurate, trying to get them removed by disputing them probably won't get you very far. Removals aren’t necessarily permanent, and accurate accounts tend to show back up. 

Can you pay your bill after it's charged off?

Yes, you could contact the debt collector or the original creditor to arrange payment for a charged-off debt. Who you have to pay depends on who owns the debt at the time. 

Paying a charge-off account in full, or negotiating a settlement for less than what's owed, won't remove the debt from your credit reports. But it can get creditors, lenders, or collection agencies off your back. 

One reason not to ignore charge-offs is that you could be sued for unpaid debts, though that's rare. Taking steps to manage charged-off debts sooner rather than later means you don't have to worry about your creditor getting a legal judgment against you.

If you're planning to pay a charged-off debt, keep a written record of all your communications with and payments to the creditor or debt collector. That's especially true if you're negotiating debt for less. Having a record can come in handy later if the debt collector or creditor tries to come back and say you still owe. 

What can you do if you can't pay your credit card bill?

If you're not able to pay your credit card bills, there are a few things you can do to get a grip on the situation. 

First, you can contact your credit card issuers directly. Many credit card companies offer credit card hardship programs for people who can't keep up with their payments because of temporary financial issues. 

If you are eligible for hardship relief, your credit card issuer might reduce or waive payments for a few months. You might also be able to get your interest rate lowered or waive certain fees. 

When you need a more permanent solution for managing credit card debt, it can help to talk to a debt consultant about debt resolution. A professional debt consultant can look at your entire financial situation and help you come up with a plan for getting rid of your debt.