As soon as your credit card payment is late, the card provider will bombard you with calls and letters demanding that you submit payment immediately. If you refuse to pay off the card balance, the creditor will eventually write off the debt. Known as a "charge-off," this process does not exonerate you from your financial responsibility to pay the creditor. In addition, a credit card write-off carries severe consequences for your credit.
Missed Payment Damage
Each time you send a credit card payment 30 days or more after the due date, your credit card company reports the payment as missed to the credit bureaus. While this lowers your credit score, you can prevent a write-off by making periodic payments and bringing the account current. If you stop making payments altogether, however, you will incur a series of missed payment reports prior to the card provider writing off the balance you owe. The more missed payments your account reflects, the more your credit score suffers.
Closing the Account
When a credit card company writes off your debt, it simultaneously closes your account to new purchases. By closing your account, the company eliminates your available spending limit. Your credit utilization ratio -- the debt you carry compared to your spending limit -- increases when you lose your spending limit without paying off your outstanding debt. A higher credit utilization ratio lowers your credit rating.
Collection Accounts
Credit card companies cannot always convince consumers to pay their debts after a write-off. Thus, the company considers the account a loss and turns it over to a debt collection agency. Like credit card companies, debt collectors can file reports with the credit bureaus. Your defaulted credit card account will then appear as both a write-off and a collection account on your credit report. Collection accounts result in considerable credit damage.
Court Judgments
Credit card companies do not always sell defaulted accounts -- sometimes they sue the debtor. If the company succeeds in obtaining a judgment against you in court, the judgment becomes a matter of public record. As a financial public record, the judgment appears on your credit file. The Fair Credit Reporting Act notes that court judgments can show up on your credit history for seven years and sometimes longer, depending on your state's laws. Court judgments cause further damage to your credit score.
Potential Tax Lien
When your creditor writes off your debt on its taxes, the Internal Revenue Service expects you to pay taxes on the debt. When you file your taxes, you must include the creditor's deduction as income. If the credit card company or collection agency wrote off a substantial amount, this could leave you struggling to pay a tax debt to the IRS. If you do not promptly pay the IRS, the IRS will levy a tax lien against all property you own. This tax lien will also appear on your credit report. Like a court judgment, tax liens are derogatory public records. An unpaid tax lien can remain a negative feature of your credit file for up to 15 years.
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