What are Charge Offs?

Charge offs are like defaults on credit cards. If you haven't paid your credit card bills for months, despite threats from collectors, you may hear that your account is going to become a "charge off." This means the credit card company will have to consider your balance as bad debt, a loss on their financial reports. It does not mean you are excused from paying, and it does not mean you will no longer have a credit card. Charge offs are mostly a concern for the credit card company.

Why Charge Offs Matter to Creditors

Credit card companies lose money with charge offs, even if you eventually pay your debt. They have to pay the bills you originally charged on your card. So, if you purchased a $500 sofa on the card, and the debt is charged off, the credit card company is short $500. Of course, they will continue to make attempts to collect from you. However, once a loan reaches this point, most borrowers cannot make the payments. This means they will look toward modifying the debt, either through settlement, refinancing or a flat out bankruptcy. Credit card companies have to absorb the loss.

Why Charge Offs Matter to Businesses

Restaurants, retailers, Internet sites and hotels alike all suffer from charge offs. These companies have to pay a credit card processing company in order to accept your credit card. This mark up, a portion of each transaction, is money right out of their pocket. The markup they are charged is similar to an interest rate; it depends on their past performance with this type of business. When you make a purchase with one of these companies that is charged off, their processing rates may increase. The credit card processors typically find that some stores, websites or other businesses have higher charge offs than others. This may be due to the clientele they attract, and these businesses will have a hard time getting a processor to accept their charges if they have too many charge offs on record.

Why Charge Offs Matter to You

Most importantly, charge offs are bad for your credit. When the credit card company writes off your debt, the company will report the charge off to the credit bureaus. They have been reporting your late payments as well, and this most recent black mark will cause your credit score to completely tank. When your credit score drops, any loans you have with adjustable interest rates will become more expensive, starting with your credit card. Of course, rates cannot go up on existing debt. However, future purchases you make with your card will cost you more than the previous purchases you made, impacting your ability to manage your money. A high number of charge offs may cause your creditor to close your credit card account. You will have a difficult time opening a new credit line if your account is closed for this reason. Avoid charge offs by responding immediately to collections calls. Stop purchasing, and begin making the largest payments you can afford to reduce your debt.


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