FSS Newsletter :: September/October 2003

Money Matters :: Can You Define What the Term "Charge Off" Means Concerning Credit Cards /
Reports?

You are seeing the term "charge off" more frequently. That's because about
1% of all credit card debt is ultimately charged off. And, whether you
struggle to make credit card payments or you have a perfect credit history,
charge offs will effect your finances.

Let's begin by finding out what a charge off really is. Wachovia Bank
offered a good definition on their website <wachovia.com>: "The removal of
an account from a credit card issuer's books as an asset after it has been
delinquent for a period of time, usually 180 days. When an account is
charged off, the credit card issuer absorbs the outstanding balance as a
loss."

For those of you who don't speak "financialese" that means that a "charge
off" or "write off" is really just an accounting entry. The lender is
saying that they don't expect to collect the debt and are not willing to
claim it as an asset of the company any longer.

But it will not affect whether the borrower still owes the money. A charge
off does not free you from the debt. Think of it this way. Suppose you
borrowed $100 from Joe. After a year passes, he doesn't really expect to
get his money back. Mentally he's "written off" the loan. He doesn't
believe that your IOU has value any more. But, that doesn't mean that you
don't still owe Joe $100. You do.

In fact, in the world of credit card debt, it's possible that it will be
harder to avoid paying the debt after it has been written off. That's
because the original lender often sells those debts to a third party when
they write them off. And the third party, often a collection agency, gets
to keep any money that they collect. So they will work very hard to collect
as much as they can. Even if that means using questionable pressure tactics.

Note that it's the lender who gets to decide whether to write-off a debt as
being uncorrectable. You may have lost your job six months ago and not made
a payment since. But you really plan on making one next month. That doesn't
prevent the lender from writing off the debt.

On the other hand, in approximately 50% of the cases, charge offs occur
when a borrower declares bankruptcy. Between one and 1.5 million people
declare bankruptcy each year. Their bankruptcy triggers the charge off.

So what happens to your credit rating when your card balance is written
off? Thirty-five percent of your credit score is based on past payment
history. A "charge off" is about the worst mark that you can get on your
credit report. It says you are someone with a history of not paying his/her
debts.

And you don't need a charge off to be penalized. If you struggle to make
your minimum payment, the fear of a write off will cause the credit card
company to raise your interest rate. Based on a borrower's payment history,
they can predict when someone is becoming a high risk. When that happens,
they'll increase the interest rates on the account very quickly. That costs
you more money every month.

OK, what happens if you always pay your bills on time? Unfortunately,
you're still effected by charge offs. The credit card companies expect that
some loans will not be repaid. So in an effort to stay profitable, they
have to charge everyone a little higher interest rate to make up for the
losses. So everyone who uses a charge card makes some small contribution.

One final issue. If you do have a charge off on your record, you might want
to consider repaying the debt if you have the money. Negative remarks will
stay on your report for seven years.

You may be able to negotiate a deal where you pay the debt and the lender
changes the status of the account to "Paid as Agreed." If you attempt to do
this, make sure that you get the agreement in writing.