You see the words “charge off” a lot these days. The society is heavily credit dependent and millions of people find themselves in difficult situations concerning their debt. In fact, a full one percent of credit card debts end up being recorded as charge offs today. Let’s examine what a charge off actually is and learn how it affects your credit rating.
A charge off has been initiated when an account is removed from the issuer of a credit card. The issuer must absorb the debt as a loss. This normally happens with accounts that been delinquent for a minimum of 180 days. So, in essence, a charge off is simply an entry made in the credit card issuer’s accounting books. The lender is taking the loss, and the debtor is going to get a credit rating smackdown as a result.
The debtor stills owes the lender who has written the debt off. Just because the lender charges the account off, it doesn’t mean that the debt was not legitimate. Many times, the lender will sell debts that have been charged off to third party collection agencies. The collection agencies then owns the debts, and they look upon them as an assets to their company. They will initiate measures to collect the debt. Many times, it would have been far getter, and easier, to deal directly with the lender before they sold the debt to the collection agency.
Although collection agencies are regulated by the Fair Debt Collection Practices Act (FDCPA), they often will result to questionable tactics to attempt to collect the debt. Some of these tactics involve:
o Threatening or abusive language;
o Telephone harassment at your home and/or workplace;
o Harassment of your family, friends and even coworkers;
o Threatening the debtor with illegitimate incarceration;
o Claiming to be lawyers or representatives of the court;
o and many more.
There are over one and a half million people that file for bankruptcy each year in the US and 50% of charge offs are results of these filings. Of course, when a bankruptcy is granted, the debts are alleviated and not able to sold to third party collection agencies.
Charge offs have a negative impact on your credit score as well. You see, roughly 35% of your credit score is based on payment history. It is one of the most valued elements for lenders to look at to determine a particular credit candidate’s risk factor. Having a charge off recorded against you shows that you have failed to make payments due on an account. The result is a lower credit rating and higher future interest rates for you.
Even if you have had a perfect payment history, the charge off will still result in higher interest rates for you. The logic is that creditors can make up for the losses that they incur as a result of charge offs by charging more interest to all those who have charge offs recorded on the credit reports.
You can attempt to negotiate with the lender who issued a charge off to your account. You may be able to have the charge off reclassified as “Paid as Agreed” which will clear the issue from your report. If you do enter into such an agreement with the lender, protect yourself by always getting it in writing.
Charge offs are happening in record numbers as the economy continues to decline quarter after quarter. Understanding what charge offs are and how they can affect you can go a long way to keeping your credit report in great shape!