Is a Credit Card Chargeoff an Option?

You should avoid a credit card chargeoff at all costs. A chargeoff will lower your credit score, which is what other lenders use to determine your creditworthiness. Having a chargeoff on your credit report is weighted heavily by potential lenders. They will classify you as a higher risk and may deny you credit. If you are granted credit, expect to pay higher interest rates and fees.

Ramifications

The card lender will report your chargeoff to the credit bureaus. Payment history is a large component when calculating your credit score, so a chargeoff is the worst mark you can receive on your credit report. Other lenders use this information to determine your creditworthiness, in which case you may be denied a loan or be forced to pay a higher interest rate and fees and in some cases put down higher deposits. This becomes especially relevant when looking to secure a loan for expensive purchases such as house or car.

Collections

Even though your account is charged off as a loss to your lender, this does not stop the collections process. The credit card lender sells your bad loan to a third-party collections agency, which will make further attempts to collect the debt. This information may also show up on your credit report. If your debt is high enough, the collection agency may sue you, and you may receive a summons to appear in court. Failure to appear will lead to a default judgment, giving the collections agent the right to proceed to garnish your wages (if it is legal in your state).

Options

You have several options to avoid a chargeoff. One option is to make minimum payments to avoid late fees. Another option is to settle with your card lender. You can also use a debt settlement service. If you settle your account after it has been charged off, your credit report will be updated to show "Charged-off-Settled" or "Charged-off Paid." Both are better than a simple chargeoff.

Discharge Debt

As a last resort, you do have an option to file a petition for bankruptcy to have your credit card debt discharged before it reaches chargeoff status. However, getting your credit card debt discharged is not certain. You must first pass a "means test" to determine eligibility. A bankruptcy filing will remain on your credit report for up to 10 years and will also affect your ability to borrow in the near term.