What is the Difference in a Credit Delinquency and a Charge-off?

Key Takeaways
  • A delinquency occurs when you miss a payment.
  • A charge-off typically occurs when you miss six months’ worth of payments.
  • The value of your account to the creditor declines, the further late the account becomes.
  • Creditors report the missed payment to the credit bureau when it reaches 30-days late.

Not all late payments are created equal. 

Falling behind on credit card payments could have different consequences depending on the level of delinquency. While any late payment meets the definition of a delinquent account, only severely late accounts reach the point of charge-off. 

Here are the primary differences between delinquency and a charge-off:

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What is Account Delinquency?

An account technically becomes delinquent as soon as you miss a payment due date. In most cases, lenders will consider the account delinquent when it reaches 30 days past due. At that point, the creditor reports the late payment to the credit bureaus, which can have an immediate and negative impact on your credit score. 

How Do Lenders Respond to a Delinquency?

Some lenders begin calling borrowers within a few days of the missed payment, especially in the case of credit card late payments. Unsecured debt like a credit card gives lenders fewer collection options than a secured like which uses a house or vehicle as collateral. 

What are Your options as a Borrower?

Borrowers can bring the account current by catching up the payments, including any late fees or penalties. Accounts with no late payments in the previous 12 months can often request a one-time fee waiver for the late fee.  

Delinquencies with two or three months of missed payments, enter default status. At this point, the interest rate could increase to the default or penalty rate, which is often 30% or more. The default interest rate applies to all existing balances and requires six months of on-time payments to reset to the original interest.  

What is a Charge-off?

A charge-off occurs when the lender no longer expects to collect the debt in full. Lenders typically charge-off an account at 120-180 days without a payment but may agree to charge-off the account early and accept a settlement for less than the full amount owed depending on the type of debt. Credit card accounts must be charged-off after 180 days of no payment activity. 

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Your obligation to repay the debt does not change after a charge-off. However, interest accrual stops. 

How Do Lenders Respond to a Charge-off?

Lenders can choose to continue debt collection efforts in-house or through a third-party debt collection agency. The creditor may also decide to sell the debt to a third-party debt buyer, who will then proceed to collect the debt which they now legally own. The longer the account goes without payment, the less value the account has to both the creditor and a debt buyer. 

The loss of account value creates a situation, where creditors will often agree to settle the debt for less than the full balance between the initial delinquency and the charge-off. 

Lenders also have the option of taking a more aggressive approach by initiating legal action against the borrower. Lawsuits increase the pressure on the debtor to pay off the debt, but also create an opportunity to settle for less than the full amount owed. 

What Are Your Options as a Borrower?

Borrowers can pay the debt in full, settle the debt for less than the full balance owed, or file for bankruptcy, petitioning the court to discharge the debt

Final Thoughts

Late payments create credit delinquencies that can eventually lead to a charge-off. The impact on your credit is immediate but temporary. Over time, the impact of late payments on your credit score diminishes, with the biggest impact during the first 12 months. Any derogatory marks on your credit disappear after seven years.  

Accounts approaching charge-off typically qualify for a settlement of less than the full balance, because the value of the account significantly declines after the creditor charges-off the debt

 

 

FAQs
  • What is the difference between a delinquency and a charge-off?

     Your account becomes delinquent when you miss a payment. It reaches the charge-off stage after going between 120 and 180 days without a payment. 

  • Can I get a charge-off removed from my credit report?

    Credit reports document your payment history for seven years. Late payments typically remain on your credit file for seven years after the first missed payment, assuming you never bring the account current. In some cases, you can request the removal of the negative information as part of a debt settlement agreement. However, the creditor does not have an obligation to remove accurate information from your credit report. 

  • Should I pay an account if it was charged off?

    An account charge-off is an accounting term that recognizes the inability to collect a payment on the debt. The term does not impact your legal obligation to pay the bill or the creditors ability to sue as part of the collection process. In most cases, once the debt is charged off the creditor is willing to negotiate a lower payoff.