What is a charge-off? Does it affect your credit score?

When a loan reaches a certain level of delinquency, the credit can write off the balance as a ¨ charge-off ¨on the owner’s consumer credit report. A charge-off is a declaration by the creditor that the debt is unlikely to be collected, and it’s one of the most severe negative items that can appear on a credit report. This process has a lasting impact on a person’s credit score, significantly hampering their ability to secure loans and credit cards. Even if the charge-off is eventually paid or settled, the fact that a loan entered delinquency will continue to haunt the consumer’s report for a staggering seven years.

Credit card delinquency is on the rise

The Federal Reserve defines financial distress as having an ‘account that is 30 days or more past due, excluding severe derogatory debt (more than 120 days past due).’ Unfortunately, this definition is becoming alarmingly common in the United States. The delinquency rate on credit cards is not just a statistic, it’s a growing concern, on an upward trajectory, a clear indicator of the mounting financial stress faced by many households. This trend should serve as a wake-up call for all of us to reassess our financial situations and take necessary precautions.

The rate hit an all-time high during The Great Recession when, in early 2009, it hit 6.77 percent. However, it’s important to note that households in the U.S. today are confronting a different situation with unique challenges. Jobs are available, and unemployment is low, but prices continue to rise in the U.S. As purchasing power diminishes, households pull on their lines of credit to fill gaps. To avoid falling into the trap of credit card delinquency, it’s crucial to maintain a budget, save for emergencies, and seek financial advice when needed. The most recent data from the Federal Reserve’s annual Economic Well-Being of U.S. Households report found that in 2023, more than a third of households living on less than $25,000 a year—36 percent—had failed to pay one of their bills in full the month before. Additionally, household savings have fallen to a level lower than before the pandemic, which means that the average family’s emergency fund is continuing to shrink.

Having households in an economically vulnerable situation where one missed paycheck or an unforeseen expense weakens the economy as a whole. In a crisis, the number of people who cannot provide for themselves is shrinking, leaving more people to depend on government assistance, which often doesn’t arrive. In 2009, nearly one in four children in the United States lived in food-insecure households. The data comes from researchers at Standford University who also reported that a decade earlier, in 1999, that rate was 16.9 percent. The researchers also noted that during The Great Recession, rates of food insecurity outpaced increases in poverty. These are some of the potential long-term consequences of credit card delinquency, underscoring the need for immediate action to address this issue.