Charge-offs are the worst entries you can have on your credit report. While they certainly affect your future ability to get credit cards and mortgages, charge-offs often affect your current credit card accounts too. Depending on your repayment status with your mortgage lender, charge-offs may affect your home and loan. If you are making current payments as agreed, your mortgage should remain unaffected. Should you be delinquent, however, your mortgage lender may "pull the trigger" on foreclosure actions faster than usual.
Charge-Offs
Lenders charge off loan balances at different times depending on their internal policies and procedures. Technically, once you are in default of the loan note terms, lenders have the right to charge off your balance. In many cases, loan notes and credit agreements define "default" as a simple 30-day delinquency. Default means that the entire balance is due and payable immediately. Few lenders will record charge-offs that quickly, but they often have this ability.
Charge-Offs and Credit Scores
More damaging than restructuring repayment or settling a debt for less than the full outstanding balance, charge-offs are visual and public proof that lenders have lost money. If your degree of delinquency was not severe, your credit score will be severely damaged. Charge-offs deliver less immediate score damage if you were already seriously delinquent; however, your delinquency will have already destroyed your once-high credit score. Credit scores always endure major reductions before (delinquency) or after charge-offs.
Charge-Offs and Bankruptcy
There is one significant difference in charge-offs and bankruptcy. Creditors charging off outstanding balances may still -- and usually do -- give these accounts to collection companies or lawyers to take all remedies to receive payment from debtors. A successful Chapter 7 bankruptcy, however, prohibits creditors -- all those included in the bankruptcy petition -- from taking any further collection activity. Both actions will negatively affect your credit report and, possibly, other open accounts, like credit cards, mortgages and home equity loans.
Credit Card Effects
Charge-offs can hurt your other non-delinquent credit card accounts, because these are lines of credit. Most credit card agreements permit lenders to modify the terms of your account -- with proper notice -- as they wish. For example, even if you are current with an account, your lender could choose to reduce your credit limit or close your account altogether. Since most credit card issuers perform periodic credit report examinations, they may learn of one or more charge-offs reported on your file. Having this information, they may decide to lower your charge limit or close your account.
Mortgage Loan Effects
Charge-offs may or may not affect your mortgage loan. If you've had your mortgage loan for a while and have always made monthly payments on time, your lender may remain unconcerned should they learn of charge-offs to your other accounts. Conversely, should you have a "spotty" payment record, your lender may flag your mortgage for extra scrutiny, more intense collection actions or even target your loan for faster foreclosure decisions, if you have consistent delinquency. Remember, violating your repayment agreement -- even a 30-day delinquency -- may put your mortgage into default, permitting your lender to demand full payment immediately.
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