What Happens to Your Credit When You Get a Charge Off?

If you stop submitting payments to your credit card company on your outstanding card balance, the company will eventually write off the debt. Referred to as a "charge off," this process does not mean that you no longer owe the debt. Rather, it reflects the fact that your credit card provider is no longer willing to carry the liability of your bad debt in its accounting ledgers. A charge off can have severe credit consequences.

Significance

After your credit card provider charges off your unpaid credit card debt, it will report this fact to the credit bureaus. The charge off will then appear on your credit report. A charge off is a derogatory entry and negatively affects your credit score. Your lack of credit card payments prior to the actual charge off, however, can damage your credit even more. According to MyFICO.com, a subsidiary of the Fair Isaac Corp., your payment history to your creditors accounts for 35 percent of your score. Therefore, the missed payments that caused the charge off have a significant negative impact on your credit.

Time Frame

Most credit card companies will charge off your delinquent account after 180 days pass without you making a payment on your overdue debt. The record of your charge off--and the late payments preceding it--will remain on your credit report for seven years from the date the account was charged off. If your creditor waits longer than 180 days to charge off your debt, however, the seven-year reporting period begins on the day that your credit card debt first went 180 days delinquent.

Considerations

Once the credit card company sells the account to a collection agency, the collection agency may also report the delinquent debt to the credit bureaus. The appearance of a collection account on your credit report will further damage your credit score, provided that the amount you owe is greater than $100. The collection account can also appear on your credit report for seven years. This time period is calculated from the date the original debt was 180 days late rather than the date the collection agency either received the debt or initially reported the account to the credit bureaus.

Effects

Lenders who review your credit report will see the charge off and subsequent collection account within your file and consider you a much higher lending risk than someone who had kept up with his debt and made timely payments. This may result in your lender charging you a higher interest rate or even denying your application. Some lenders will approve financing for you, but only under the condition that you pay off the amount that you owe. Unfortunately, while doing so may help you get financing, it doesn't improve your credit score to pay off an old charge-off if your account has already been turned over to collections.

Warning

If you ignore the debt, the collection agency that purchased the debt--and in some cases, the original creditor--may file a lawsuit against you. You have the option to fight the lawsuit in court, but if the creditor wins a judgment against you, that judgment will appear in your credit file. A judgment will cause additional damage to your credit. Even worse, if the statute of limitations for judgment collection in your state is longer than seven years, the negative record will remain from the date of the court's decision until the statute of limitations in your state runs out. In some states, this can be 10 years or longer.