The economic meltdown is affecting every industry in the country. Amongst the worst hit is the credit industry and people across the country are losing their jobs and are unable to make their payments. The impact of the economic turmoil is seen and felt in the credit card industry as the number of charge-offs reach unprecedented levels. In fact, the credit card charge off rate in the month of February represent an all-time high in Moody’s Credit Card Index’s twenty year history.
What are Credit Card Charge-Offs?
So, what are credit card charge-offs and why do you need to worry about them? Credit card companies charge-off accounts that have been late in their payments for over 6 months. Most people believe that the credit card charge-off is equivalent to canceling of the credit card balance. They believe that since the credit card company has charge-off their balance, they are not obligated to pay it anymore and that they can simply walk away from their debt.
The Truth About Credit Card Charge-Offs
The shocking truth is that credit card charge offs do not imply that your credit card debt goes away. In fact, it will come to haunt you for at least 7 seven years. Just because your credit card company has written of your balance as a loss or bad debt, does not mean that you are not obliged to pay it back. Every time a credit card company writes off outstanding payment as a bad debt, it reduces their overall profit margin even reduces its tax liability. To reduce their losses, credit card companies then sell their outstanding debts to a debt collector for a fee. What this implies is that even if the credit card company is not interested in recovering its money from you, the debt collector is. And a debt collector may even sue you to recover the outstanding debt, adding to your financial woes.
It gets worse…
There are further implications to credit card charge-offs. Credit card charge-offs appear in your credit report and affect your credit ratings. According to the Fair Credit Reporting Act (FCRA), it stays on your credit report for a period of seven years. This can present huge problems when you are applying for a mortgage, car or a job. You will also need to pay higher charges for amenities like insurance and utilities just because you have a bad credit rating. This entry will continue to reflect in your account even if you clear your outstanding debt. In some cases, some credit card companies may be willing to remove the entry in return for the balance payment, but this option may not always be available.
How to Avoid Credit Card Charge Offs
Whether it is to avoid to manipulative tactics of the debt collector or to preserve your credit rating, it is important for you to avoid credit card charge-offs altogether. The only way to do it is to make sure that you make your minimum payment due every month. For this, it is important that you use your credit card responsibly and ensure that your debt is not unmanageable.
