A Charge Off is a Serious Hit to Your Credit Rating
The potential of a charge off may sound like a way to resolve your problems with credit card debt. However, this is one of the worst things that can happen to you as a consumer.
What Causes a Charge Off?
Credit card lenders have charged off more accounts in the past two years than ever before in the history of the credit card industry. The charge off is the last step in the attempts of a lender to collect payment when you default on your debt.
If you are late on a credit card payment or miss one or two payments entirely, your lender will assess fees but you can catch up the payments without causing major damage to your credit. You will create a negative report in your credit file but that can be overcome with timely payments over the next 6-12 months.
If you stop making payments on your credit card balance, the lender will try to collect either through the bank's collection department.
If that is unsuccessful, the lender will send the debt to an outside collection agency that will try to collect what you owe. They will call you frequently demanding payment and may even contact neighbors and relatives in attempts to collect payment.
If the debt goes to a collection agency, the banking is selling the debt to a third party for a few cents on the dollar. These companies are extremely aggressive in trying collect. Any funds you pay to a collection company is profit for that company with only a small portion going to the bank who sold the debt.
The collection company may also sue you in civil court to collect that debt. In past years, debt collectors would try for several weeks or even months to collect but if you did not respond or pay eventually they would give up.
That is no longer the case. Collection has become big business in financial circles today. The high number of consumers defaulting on credit card payments has led to high profits for collection agencies. Buying unpaid debt for ten cents on the dollar, collectors aggressively pursue you for payment.
If all attempts to collect payment on your debt are unsuccessful, the lender may issue a charge off. You might think this is an easy way out of your financial problems.
However, a charge off does not make the debt disappear. If your lender is unable to collect after a period of time, it is obligated to remove the debt from its books and lists the debt as uncollectible.You may believe a charge off removes the debt but that is not the case. Afterwards, the lender may, as part of the charge off, sell the debt to a collector.
That's when collection efforts can get nasty and you may be faced with constant demands for payment or even a civil lawsuit.
The Long Term Damage
Your credit rating is significantly harmed by a charge off as this can remain in your credit file for up to seven years. When you apply for a mortgage or a car loan you may well be denied due to a charge off in your file.
You can be harmed in other ways that are not as readily apparent. Many employers check the credit file of those who apply for jobs.
Insurance companies charge higher rates for consumer with bad credit and landlords check your credit if you apply to rent a property. Utility companies may require a large deposit for new service based on that charge off.
How To Avoid
Making only the minimum payment each month on your credit card is not a good financial practice for most consumers. In times of financial stress, minimum payments may be a good idea.
If you fear you may be unable to pay your credit card in the future, stop charging to the card immediately. Make minimum payments even though it does little to reduce your debt. Paying the minimum amount due is preferable to facing a potential charge off.
If you fail to make the minimum monthly payments you may be faced with a charge off. Though this may seem like an easy way out of your debt it actually increases your financial problems and will damage your credit file for years.
Rebuilding your credit after a charge off is difficult. It will be hard to be approved for loans and may require using secured credit cards issued by reputable lenders to create a good record of payment to overcome the damage done by a charge off.
I also strongly recommend you to explore our guide on debt consolidation and discover how you can use the strategies outlined.