How does debt cancellation on credit cards happen?
When you fall behind on the required payments on your credit card, it can be disastrous for your credit. Ultimately, your credit card issuer will cancel your debt and add the account status to your credit report. The term “debt cancellation” can be misleading. You might easily think that this debt has been forgiven. Unfortunately, this is not the case.
How does debt cancellation on credit cards happen?
Your credit card agreement requires you to make the minimum payment by the due date each month. If you are late, you can submit the payment before 30 days have passed from the due date and avoid having a late payment notice marked on your credit report. However, if you do not make the payment by the next due date, your payment will be 30 days late, and a notice will be placed on your credit report.
A new late notice is added to your credit report every 30 days. Late notices progress in 30-day increments: 30 days late, 60 days late, 90 days late, etc., until it reaches 180 days late.
After 180 days or six months of non-payment, your account will be canceled.
Note: Your account can be canceled even if you are sending payments, but those payments were always less than the minimum due. You need to bring your account current by paying the full minimum if you wish to avoid debt cancellation.
Why are credit card debts canceled?
Businesses, including creditors and lenders, face profits and losses every year. They earn profits from revenues and incur losses from defaults. When a creditor cancels your account, they declare your debt as a loss for the company – because you have not been making payments for an extended period.
Even though the creditor has acknowledged your debt as a loss in their financial records, you will not escape unscathed. The creditor will add a negative entry (debt cancellation) to your credit report and continue trying to collect the debt. The credit card issuer may try to collect the due amount through its collections department or send the account to a third-party debt collector.
Debt cancellation and credit reports
Debt cancellation will remain on your credit report for seven years from the date of cancellation. The outstanding balance can still be legally collected (you could be sued for it) for several years, depending on the specific time frame set by your state’s statute of limitations on debt.
Paying off the outstanding balance in full will not remove it from your credit report. Instead, it will be updated with the status “Paid Charge-Off” if you pay in full or “Settled Charge-Off” if you settle the debt, and the account will show a balance of $0. One of these statuses is better than “Charge-Off” with an outstanding balance, but it is still undesirable.
Note: The only way to remove a charge-off from your credit report is to wait seven years or negotiate with the creditor to remove it after you have paid the account in full. It is a tough negotiation, but some creditors may agree if you present a strong case to the right person within the company.
Recovery
Although a charge-off on your credit report negatively impacts your credit score, it does not mean that all is lost. You can rebuild your credit after a charge-off by settling the outstanding balance, making timely payments on all your other accounts, and giving it some time. Over time, the charge-off will have less impact on your credit score, especially if it is offset by other positive information.
It happens
Debt cancellation occurs if your credit card is 180 days (or six months) past due. You will be unable to use your credit card or make the minimum monthly payment. The debt cancellation status will appear on your credit report and will last for seven years.
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Sources:
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts in our articles. Read our editorial process to learn more about how we fact-check and maintain the accuracy, reliability, and quality of our content.
Capital One. “Credit Card Charge Off.”
Equifax. “What is a Charge-Off?”
Federal Trade Commission. “Fair Credit Reporting Act – § 605. Requirements Relating to Information Contained in Consumer Reports.” Page 22.
Federal Trade Commission. “Debt Collection FAQs.”
Source: https://www.thebalancemoney.com/what-is-a-credit-card-charge-off-960409
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