If you fail to make your credit card payments, typically within 180 days or six months after the first delinquent payment the credit card company will "charge off" your debt. A charge-off is basically a write-off (forfeited as bad debt) that gets reported to the credit bureaus as a charge-off and negatively effects your credit rating. A number of factors determine how much a charge-off will lower a credit score.
FICO Score
Credit or FICO (Fair Isaac Corporation) scores range from 350 to 850, with higher scores indicating a better credit history and better debt management on your part. The most important aspect of figuring your FICO score is your payment history, accounting for 35 percent of your total score. How much a charge-off will lower your credit score will depend largely on the payment history reflected in your credit report.
Credit Reporting
The Fair Credit Reporting Act stipulates that a credit card charge-off must be removed from your credit report after a period of seven years. The reporting period officially begins on day 180 after the last payment on the account was made. Once the charge-off is removed from your credit report, all evidence of the debt and your payment history for the particular credit account disappear as well.
Collection Agencies
Many credit card companies sell charged-off debts to collection agencies. Once a charge-off has been carried out and the debt has been sold, this does not relieve you from the responsibility of paying off the debt, and the collector will be contacting you. After the debt is taken over by the lender's collections department or sold to a collection agency, you will have two entries for the account on your credit report: a charge-off from the original lender and a status of "In Collections" from the collection agency. Collection agencies add additional fees to the debt and may file a lawsuit if the debt remains unpaid.
Effects
By the time the creditor charges off your debt, you have already done substantial damage to your FICO score with the documentation of continuous late payments in your credit history. As 35 percent of your FICO score consists of payment history, the accumulation of late payments steadily drops your credit rating. Around the end of the 180-day reporting period, the bulk of the damage will have been done by the delinquent payments, rather than by the charge-off itself. Depending on your previous payment history and credit score, the charge-off and the process leading up to it could cost you 50 to 150 FICO points.
Considerations
A person with a previously high credit score may see a more significant drop in her FICO score as the result of a charge-off; whereas, someone with a history of consistent credit issues and a low score may only lose a few points.
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