Credit Card Charge Offs – What You Need To Know!

During the Great Recession, the economic meltdown affected every industry in the country. Amongst the worst hit were the credit industry… the impact was definitely felt as the number of charge-offs reached unprecedented levels. In fact, the credit card charge off rate in the month of February 2009 (during the climax of the recession) represented an all-time high in Moody’s Credit Card Index’s twenty year history.

credit card charge off rate chart

(as of Nov. 2011 the charge off rate was 5.81%)

What Are Credit Card Charge-Offs?
So, what are credit card charge-offs and why do you need to worry about them? Credit card companies charge-off accounts that have been late in their payments for over 6 months. Believe it or not, a small percentage of the population thinks that a charge-off is equivalent to canceling the balance. They believe that since the card issuer has charged-off the debt, they are not obligated to pay it anymore and that they can simply walk away from their debt (if only it were that easy).

How The Charge Off Can Haunt You For Years

Your debt doesn’t go away. In fact, it will haunt you for at least 7 seven years (on your credit record). Just because your bank has written of your balance as a loss or bad debt, it does not mean that you are going to get off scott free on paying it.

Every time a card issuer writes off outstanding payment as a bad debt, it reduces their overall profit margin… and that reduces their tax liability. So to reduce their losses, credit card co’s sell their outstanding debts to a collector for a fraction of face value. That means even though the bank is no longer interested in recovering money from you, the debt collector is. And a debt collector may even sue you to try and recover the money.

It Gets Worse…
There are further implications to credit card charge-offs. According to the Fair Credit Reporting Act (FCRA), the charge off will stay on your credit report for a period of seven years. This can present huge problems when you are applying for a mortgage, car, and maybe even a job (if the potential employer does a credit check). Depending on the state you live in, you may need to pay higher rate for things like insurance and extra security deposits for utilities.

How to Avoid a Credit Card Charge Offs?

Whether it is to avoid the headache of a debt collector or to preserve your credit rating, it would be great to avoid the credit card charge-off altogether. Obviously, the only way to do it is to make sure that you make your minimum payment due every month, but of course that is easier said than done if you have massive debt. If you want some ideas and feedback for your situation, I recommend sharing your story on the message board.

How To Fix Your Credit After a Charge Off
Once your credit card debt (or any debt for that matter) has been charged off, rebuilding credit will unfortunately be an uphill battle. However if you play the game right, it is possible to do, but please realize it won’t happen overnight. There are secured credit cards which are specifically created for rebuilding credit. Starting with one to re-establish a good payment history is usually the first step that I recommend to people in this situation.

updated Dec 2011

 
Comments
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If a card owner has a credit card that shows a charged off by creditor, can the card owner still use the card?

Thanks.

Capital One charged off my credit card in March 2008 but I have credit card statements from Capital One
In 2010 & 2011 requesting payment. Can Capital One still request payment
After they charged the credit card off?

Learned Mylesson

when,you get the credit card offers in the mail,shred them immediately! Don’t fall for the bait. The credit card companies want to enslave everyone for their own enrichment. Their executives draw multimillion dollar salaries at the largest banks for ripping everyone off for billions. and have no mercy if you cannot repay them. Then,they unleash the wild boar lawyers who will sue you, get a judgment and then garnish your paycheck. When you are brought to your financial knees, the next step may be personal bankruptcy to free yourself. Why let these predatory parasites get a nickel? Forget credit! Remember Benjamin Franklin’s famous quotation: “Credit is the modern form of slavery.”

Went from 2 incomes to.1 now all my credit cards are behind 4 to 6 months and one has been charged off. I didn’t have good enough credit our.owe enough for.any options I was able to.find (consolidate, loans, counseling, and bankruptcy…..amy other options available?

Do you know what happens to the miles on a credit card when its charged off? the miles were accrued when payments were made… do they go away when the cc company charges off the debt?

I wonder what the chargeoff rate will be by the end of the year

Credit card bills are the last priority for a lot of folks

This is scary.

ouch not a pretty graph there