What Is a Credit Card Charge-Off?

A charge-off is a debt a creditor deems unlikely to be repaid after a borrower misses a certain number of payments. You’re still responsible for repaying that debt, and in general, a charge-off can have serious effects on your credit score.

Let’s explore how charge-offs work and how to avoid charge-offs.

When do charge-offs happen?

A credit card charge-off can happen if you miss 4 to 6 months of payments, depending on your issuer’s terms. It can also happen if you file for bankruptcy.

Credit card charge-offs vs. collections

Charge-offs are when an issuer believes the cardmember won’t repay what they owe and writes it off as a loss.

At that point, the issuer may sell it to a collection agency. That can lead to:

• Calls, texts, letters, emails or social media messages from the debt collector
• A lawsuit
• Wage garnishment, if court-ordered

How does a charge-off impact your credit?

Charge-offs can lead to serious credit score impacts. Factors can include:

• Payment history: Charge-offs happen after months of missed payments, so those can negatively impact your credit score. Missed payments generally stay on your credit report for 7 years.
• Charge-off report: Lenders can report a charge-off to the 3 major credit bureaus, which can also negatively affect your credit. This can stay on your credit report for up to 7 years.

If your debt is sent to collections, that can also be reported to the credit bureaus, negatively impacting your credit.

Are you still responsible for paying charged-off debt?

Yes, in most cases, you’re still obligated to pay off a charged-off debt, even if the creditor no longer actively pursues payment. If you pay the debt off, it may show up on your credit report as a paid charge-off. In general, that’s still considered a negative mark on your credit report and may remain on your credit report for up to 7 years. However, it may be viewed more favorably than an unpaid charge-off.

How to avoid a charge-off

There are a few strategies that can help you avoid missing credit card payments and having an account charged off:

Budget carefully

Establishing a budget and tracking your income, expenses and payment due dates can help you avoid missing payments.

Set up automatic payments

Setting up automatic payments for at least the minimum amount due each month can help prevent accidental missed payments.

Communicate with your creditors

If you’re struggling to pay your bills, contact your creditors immediately. You may be able to work out a payment plan or other arrangement.

Rebuilding creditworthiness after a charge-off

Beyond paying off the charged-off debt, you may be able to help rebuild your credit after a charge-off through secured credit cards, credit-builder loans and credit report monitoring.

Secured credit cards

Secured cards are an option for people rebuilding their credit. These cards require a security deposit, which the lender can use to cover missed payments.

Making consistent on-time payments over time can show lenders you’re a responsible borrower. Once you’ve made consistent payments on your secured card after 6 to 12 months of use, some issuers may return your deposit and graduate you to an unsecured card.

Credit-builder loans

Consider credit-builder loans, which are small loans designed to help you build credit with regular payments. Instead of giving you the loan amount, the lender holds it as collateral. They keep the money in a savings or other interest-bearing account until you pay everything back.

Continuous credit report monitoring

When you’re rebuilding credit, it’s important to regularly review your credit report for accuracy. That can also help you track your progress as your hard work pays off.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.