If you stop paying your credit card bills, the company will eventually charge that debt off. This results in a charge-off being placed on your credit report. Charge-offs are negative notations and can be very damaging to your FICO score. How damaging this notation is depends on your previous credit history and how recently the charge-off occurred. If the debt is sold to a collection agency, a charge-off can continue to indirectly affect your score for years to come.
FICO Score
Your FICO score is a number the credit bureaus assign to you to measure how well you manage your debts. FICO scores range from 350 to 850. The higher your score is, the better. FICO scores are calculated by taking into consideration factors such as the types of debt you have, how old your debts are and how timely your payments on those debts are. Certain behaviors, such as not accruing too much debt and paying your debts on time, improve your FICO score. Incidents such as bankruptcies, judgments and charge-offs that appear on your credit report lower your FICO score.
Credit History
How much your FICO score will drop when a charge-off appears on your credit report depends on your past credit history. If you have a history of late payments and charge-offs already appearing on your report, your FICO is probably fairly low and may not drop more than a few points. If, however, you have been careful to maintain a good credit history and your score is moderate to high, you can expect to see a much larger loss of points from a charge-off. How many points you will lose is due more to the late payment history of the account than to the charge-off itself.
Payment History
Credit card companies typically do not charge off an account until the account has gone 180 days without payment. Payment history accounts for 35 percent of your overall FICO score. As you gradually accrue 30-, 60- and 90-day late payment notations on your credit report, your score is steadily dropping. These notations continue until the account is 180 days late. By the time the creditor charges off the debt (usually around the 180-day mark), your FICO score has already been severely wounded. The end result of the whole process is a lower FICO, but the late payments leading up to the charge-off do the bulk of the damage--not the charge-off itself. The entire process can cost you anywhere from 50 to 150 FICO points, depending on your previous credit score.
Reporting Period
The Fair Credit Reporting Act specifies that charged-off credit card debt can remain on consumer credit reports for only seven years before it must be removed. The reporting period begins 180 days from the day the last payment was made on the account. As soon as the charge-off is removed from your credit report, all evidence of the debt goes with it. This includes your payment history on the account and any negative notations placed on your credit report by collection agencies attempting to collect the debt. When this information is removed, your FICO score will automatically increase.
Effects
Your FICO score is the number that lenders look at when deciding whether or not to approve you for a loan. If you are approved, your interest rate will be much higher with a low FICO score than with a high one. In addition, charged-off debts are almost always sold to collection agencies. A collection agency will add extra fees to the debt and a new negative notation to your credit report--whether you pay the debt at that point or not. You may also be subject to a lawsuit over the debt. This can result in a judgment being levied against you, and your FICO score will suffer even further. Judgments are not subject to removal after the reporting period for the original debt has expired.
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