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The Ins and Outs of a Credit Card Charge-Off – Creditcards.com

  • May 26, 2020
  • By: Greenpath Financial Wellness

From creditcards.com, Jeffrey Arevalo, financial expert at GreenPath Financial Wellness, shares what a credit card charge-off means to borrowers.

In today’s economic climate, more people find themselves unable to make monthly credit card payments.

If payments are missed for a few months, creditors might decide that it is better to write off the amount you owe and deem it a loss for its tax purposes.

Called a “charge-off,” a creditor takes this action from about four to six months after you stop making your payments.

A credit card charge-off can be put into place even if you have been making less than the minimum payment you owe.

The article makes the point that a charge-off is a loan that a lender essentially considers as defaulted.  That means there are credit consequences. It is possible that your credit score will take a hit for up to seven years from the date of the original delinquency.

The article summarizes key regulations pertaining to credit reporting.

For instance,  the Fair Credit Reporting Act says that a lender that starts the collection process and reports this to a credit reporting agency must also report the original date of the delinquency that led to the charge-off within 90 days. If a debt collector is reporting to a credit reporting agency about a creditor’s accounts, it should report the date of delinquency that the creditor provided.

What a charge-off means to you

A key point to remember is that a charge-off doesn’t absolve you of responsibility for the debt.

You will still owe interest on the balance. Even after a credit card charge-off, the lender could turn over your account to an internal collections department to follow up with you. Or it could hire a debt collector to do the job or even sell the debt off to a debt collector for less than the amount you owe.

‘Paid in full’ is better than an unpaid credit card charge-off

In case there is anything inaccurate about the reporting, you could dispute it with the creditor or ask the credit bureaus to investigate.

Paying a balance on a credit card charge-off will be helpful to your credit score over time. Lenders view charge-offs that have been “paid in full” more favorably than those that have not been paid.

Also, some credit scoring models, such as FICO 9, don’t count paid off collection accounts in their score calculations, so it is in your interest to pay off the delinquency, Jeffrey Arevalo, financial wellness expert at GreenPath Financial Wellness, advises.

Asking for help during pandemic won’t hurt your credit

Noting the financial hardships caused by the pandemic, Arevalo says, “If you seek assistance (forbearance, for example) because of a COVID-19 hardship, data reported to credit bureaus by a lender will not cause a person’s credit scores to go down.

“If you are current at the time you ask for help, they will continue to report you as current during your hardship. The CARES Act requires lenders to report to credit bureaus that consumers are current on their loans if consumers have sought relief from their lenders due to the pandemic.”

Those who might be wondering what a credit card charge off means to them should consider contacting GreenPath for a conversation about debt management. 

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Jeff Arevalo

Jeff Arevalo is a Financial Wellness Expert and has been with the Greenpath since 2006. He possesses a strong passion for helping others and takes great pride in providing strong financial education and effective money management tools to help make a difference in people’s lives. Jeff and his wife recently welcomed a baby boy to their family and are excited to navigate the world of parenthood for the first time.