Understanding the Credit Lifecycle – Part 2: Pre-Charge-off Collection

Key Takeaways
  • Precharge off is the time between the first missed payment to 179 days without a payment.
  • After 180 days without a payment, the account gets charged-off as bad debt.
  • Creditors can begin collection efforts immediately after you miss the first payment.
  • Late fees and penalty interest can occur during the pre-charge-off stage.
  • Missing payments on an account will lead to negative marks on your credit report for seven years.

Part 2 of a 5-part series on the Credit Lifecycle. If you missed the first article on Understanding What Happens To Debt, you can find it here.


The pre-charge-off collection period begins at the first missed payment and lasts until the account goes 179 days without a payment. Once an account goes 180 days without a payment, the credit card issuer must write-off the account and recognize it as uncollectible.  If you run into trouble paying your bills, and go delinquent, you will have to pay additional late fees and possibly penalties.  Multiple late payments or extended delinquencies may also trigger a hike in your interest rate, causing your balances to rise even quicker.  When you try to catch the account up by making past due payments and then miss more payments, it will extend the time between delinquency and charge-off if you end up making no payments for a period of 180 days. 

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Missed Credit Card Payments

Missing a credit card payment can have immediate consequences in the form of collection calls. Creditors often begin reaching out to borrowers within a few days of the late payment. The objective of the initial contact is to assess your situation and get the account current as quickly as possible. These very early stage contacts usually come in the form of a reminder call, asking if you possibly forgot to make a payment or to see if you need a little extra time to make the current payment.

Late Fees and Other Charges on Credit Cards

Credit card contracts do not offer a grace period on your monthly payment. Paying a single day beyond the due date will result in a late charge, which ranges from $25 to $38 each month you make a late payment.  These charges may also come with other fees if your account is over the balance limit or if a payment you made gets declined.  Combined, these fees can add up quickly.

Credit Card Interest Charges

Most credit card agreements impose a penalty interest rate that kicks in when you miss two payments. You will pay this higher rate until you catch the account up and make six additional on-time payments. The penalty interest rate can be 30% or higher and grow your outstanding balance rapidly.  

Credit Score Impact

Creditors report account activity to the credit bureau once each month, including any missed payments. All derogatory marks remain on your credit file for seven years, from the event, except for bankruptcy, which may last up to 10 years depending on the type of bankruptcy filed. 

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Credit scoring algorithms place more weight on recent activity, therefore, you will see the largest negative impact on your credit score during the first 12 months following delinquency. 

New scoring models, like the FICO 9, completely disregard paid or settled collection accounts that were previously classified in collection. Therefore, paying or settling an account for less than the full amount owed removes the account for scoring consideration under this scoring model and may lead to a faster credit score recovery.  

Delinquency to Charge-Off

When you fail to make a credit card payment on time, the account immediately becomes delinquent. If you continue to miss payments for six months, the debt will reach the stage of charge-off. At any point between delinquency and charge-off, you can bring the account current, make payment arrangements, or settle the debt for less than the full balance if the creditor agrees to do so. 

Once the account reaches the stage of charge-off, interest and penalties no longer accrue on the account and the balance stops growing, but the creditor’s rights to collect the outstanding debt never expire, however, the statute of limitations under which you may be sued to recover the outstanding debt does vary by state from 4-7 years.  

Collection Efforts

Lenders will either use in-house collection departments or contract with a third-party debt collection agency to recover the delinquent amount outstanding.  While a third-party debt collector may be attempting to collect an outstanding debt, you always have the ability to make a payment directly to the creditor if the account has not yet been charged-off or sold.

In-house collection departments give the lender more leeway with payment arrangements or debt settlements. The creditor does not have to share payments with a debt collection agency, and they have a lot of flexibility in what arrangements they can accept.  Creditors also have special programs for people who have experienced a hardship, so if you qualify under a hardship program, be sure you are negotiating directly with the creditor that sets these program guidelines.

Third-Party Debt Collection Agencies: When the original creditor hires a debt collection company, the debt collector must work within the parameters set by the original creditor. Collection agencies receive payments based on how much they collect from a borrower. The more money the companies get from you, the more they get paid from the creditor as they are generally paid based on a percentage of what they collect.  Also, the age of the debt also determines the percentage the collection agency receives.  As the debt ages, it becomes harder to recover, and therefore, the higher percentage the agency is paid for the successful recovery of the debt.

Final Thoughts

Failed attempts to bring an account current can result in significantly higher balances because your account remains at the penalty rate, accumulating late fees, for a longer time. Each time you make payments to catch up on the account, and then become late again, interest and penalties continue to accrue until you reach 180 days without a payment. At this point, the account must be charged-off by the balance and the loss must be recognized for accounting purposes.

During this time, working with the original lender to pay off the debt for less than the full balance, can eliminate the debt and bring you debt relief. Working with debt settlement professionals can also be a great way to eliminate the emotional stress you have dealing directly with creditors but also negotiating the best overall discount percentages on every dollar you owe. 

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

    A delinquency occurs when you miss the first payment. A charge-off occurs when your account goes 180 days without a payment. During the time between delinquency and charge-off, you could pay late fees and penalty interest. After a charge-off interest and late fees stop. 

  • What is penalty interest?

     Some contracts, like credit cards, include default or penalty interest rates. The penalty interest kicks in when you miss two consecutive payments. The higher rate could be as high as 30% and will cause the balance to grow faster making, it even harder to bring the account current.

  • How will a delinquency or loan default affect my credit?

    Any time you miss a payment, the creditor reports the activity to your credit report. Missed payments have the biggest effect on your credit score. Sending your account to a collection agency will lead to a change in the account status. The agency will report the account as in collections and the original creditor will stop reporting additional late payments. Any negative information remains on your purport for seven years from the first missed payment.