If you own a credit card, chances are you’re checking your credit report regularly to verify your transactions and keep track of your credit score. And why not? The next time you make a credit application, your lenders will check this document to verify your repayment history and determine your debt repayment ability.
During one such check, you notice an entry “credit charge off”. Now, you’re Googling questions like - “What does charge-off mean on credit report?”, “Does it impact my credit score?” or “Can I do something about it?”
This blog answers all those questions for you. Read on.
What is a charge-off?
Charge-off, meaning written-off, refers to when your card company writes off your debt for their accounting purposes. Card companies do this when they don’t believe they will receive the money owed, given your poor debt repayment habits. And this can impact your future loan borrowing ability and credit history.
But before we go into details of how a charge-off can impact your credit score, let’s take a better look at how you can land yourself in such a coop.
Why do companies use a charge-off?
Credit card companies allow cardholders to make purchases and take loans on their credit cards, provided they repay the dues timely.
Most companies have an interest-free period ranging from 18-55 days from the transaction date, wherein cardholders can make transactions and not earn interest, provided they settle the entire bill before the due date. Besides that, card companies also offer the option of minimum payment, whereby cardholders can pay the minimum amount due and avoid being delinquent. Note that the remaining balance gets carried forward to the next month and earns interest too.
Now, if you cannot pay off your minimum amount before the due date, you still have up to 29 days to pay the sum off. On the 30th day, the card company puts a notice on your credit report, marking the payment delay. This continues every 30 days that pass over your past missed payment.
If you fail to pay your dues for six consecutive months or pay below the minimum amount, the company charges off your account.
Now that you know the answer to the question 'What is a charge-off account?', let’s examine how it can impact you.
What happens when a credit card is charged off?
Once a card company reports a credit card identifies you as a delinquent through your debt repayment habits, it also reports the same to credit bureaus. Now, these credit bureaus enter the charge-off in your credit report. This shows up under “Negative Accounts” or “Negative Items” for up to seven years after being marked as delinquent.
Besides, the credit card company might even sell your account to a third-party collections agency to retrieve the unpaid dues. Your account will show under the “Account in Collections” section of your credit report when that happens.
Together, these not only show your account in a negative light to prospective lenders, but also impact your credit scores negatively.
How credit scores get impacted due to a charge-off?
Since timely repayments make up about 35% of your credit score, delaying repayments consistently can significantly impact your credit score. Typically, the longer the delay, the greater the impact on your credit score.
While a single missed repayment of up to 30 days after the due date may not impact the credit score, consistently missing the repayment window may cause your credit score to drop.
A 60-day delay can cause more damage to your credit score, given that companies report your payment status to credit bureaus every 30 days.
Usually, around the 90-day mark, the credit card bill is classified as a Non-Performing Asset (NPA), depending on the card company, impacting your credit score.
After this, the card company may classify the late payment as a ‘Collection’ and add it to your credit report. This results in your credit score dropping further.
How to remove a charge off?
1. Look for mistakes in your credit report
The first thing you should do when you notice a charge-off on your credit report is check whether it is correct. Sometimes these credit reports mark accounts as "Charged-off" or "Written-off" incorrectly. If you have paid off your dues timely and notice an erroneous entry in your credit report, file a dispute online with the credit bureau to rectify it.
Here's a rundown of how to resolve a credit dispute with CIBIL online.
Visit the official CIBIL website or www.cibil.com and create an account if you don't have one online. Go to 'Credit Reports' and click on 'Dispute Centre'. Now, click on 'Dispute an Item' and fill out the form. Under 'Dispute Type', enter the value you want to dispute for inaccuracies. Once you submit the form, CIBIL will verify the information with the credit card company and update your credit report.
2. Settle your debts
Suppose the charge-off marked on your credit report is legitimate, you must quickly pay it off since you are legally responsible for it.
You can settle the charge-off amount directly with your credit card company if it hasn't sold your account to a debt collection agency. But before you do, ask the following questions - 'Do you accept loan settlement?', 'What is the non-repayment period?', 'What is the outstanding loan amount?'. This will help you plan your payments.
Our advice? Pay off the outstanding amount in full as quickly as possible. This will help you update your loan settlement status quickly.
In case, your card company sells your account to a collections agency, you will need to repay your dues to them.
How to avoid landing up in the defaulter list?
The easiest way to avoid landing on the payment defaulter list is to pay off the minimum amount due monthly. This will show your credit card company that you are not a delinquent and can repay your dues.
Another thing to do is to pay off the credit card dues on time and in full whenever possible. This way, you don’t have to worry about your debt repayment, given that the amount borrowed and the interest are fully paid off.
Conclusion
Now that you know all about charge-offs, how they impact the credit score and how you can avoid them, you’re on your way to make better credit decisions.
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05 July 2023
6 mins read
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