I recently started paying more attention to a common accounting practice in the credit card industry known as “charge-offs.”  This week there was news out from the various credit card companies that their “charge-off” rates are showing signs of slowing down. I guess that’s a good thing…but as unemployment and credit delinquencies (not coincidentally) rise, more borrowers are facing this charge-off thing.  What’s more is that there seems to be some confusion about the actual damage this can do to a consumer’s credit report. I had my questions, too, so I did some digging around and here’s what I gathered:

A charged-off account basically means that the creditor has written off a consumer’s account as a loss because there’s practically no hope of ever getting the balance paid. This usually happens when a consumer hasn’t paid anything towards his balance in 6 months.  The account is closed with the creditor and the debt is transferred to a collection agency.

So does this mean the borrower basically got a Get Out of Jail Free card? Nope. When the charged-off account gets handed over to a collection agency, the annoying pursuit to settle the debt with the consumer begins. Expect to get phone calls. Many. For up to seven years until you strike a deal.

Additionally a charge-off is one of the worst stains you can have on your credit report. Bankruptcy is probably the only thing uglier. The label sticks to your credit report for up to seven years and even if you settle the debt before then, the “charge-off” label won’t disappear until the seven years are up.  The only difference then is that your report will say the charge-off was “paid in full” or “settled.” But let’s face it, in the eyes of a creditor or a bank loan officer you’re probably still seen as a dead-beat borrower.

So what happens after 7 years if you still never ever pay a dime towards your charged-off debt? That’s a good question. I’d like to meet someone who survived the collection agency phone calls and can tell the story. You could consider yourself sort of lucky, I guess. But if you want to attain a loan in year 8, 9 or 10, creditors may wonder why you’ve had an inactive history.  Hmm. Looks like the last time you had a credit card account was 7 years ago. What happened in between?

Maybe you can try to come up with a good lie, but I’m convinced ignoring your debt is never the solution.