Oftentimes the language used in credit reporting can be confusing to consumers. Charge-off is one of those somewhat baffling terms. Let’s look closely at credit card charge-offs and what they mean for your credit reports and scores.

What is a credit card charge-off?

A charge-off is a debt that has gone continuously unpaid for a sufficient amount of time—usually around 180 days—and that the creditor has given up on trying to collect. Up to this point, the account has counted as an asset on the creditor’s balance sheet.

When it is deemed uncollectable, it can no longer be counted as an asset and is “charged-off.” While that sounds like they have tossed out your debt, that’s not the case. The write-off is purely an accounting function that applies only to the company’s balance sheet, not your debt. You still owe the bill, and they still expect you to pay it.

How a charge-off affects your credit score

In a word, badly. Charge-offs by their nature mean that you haven’t paid your bills.

Payment history is the most influential factor in FICO scoring and accounts for 35 percent of your total score. Charge-offs usually happen after about six months of non-payment. So, for every month the account gets further behind, your score takes another hit. By the time a charge-off happens, your credit score will have significant damage (second only to bankruptcy). Once you cross that 180th day, the charge-off does major damage—even if you had a good score to begin with.

Do you still have to pay charged-off debt?

Yes. Once an account is charged-off, your debt will likely be handed over to a debt collector. If that happens, your credit report will reflect a zero balance on the charge-off, probably with a note saying “sold to” or “transferred to” and the name of the collection agency. You’ll also have a new line called “collections” that shows the balance due, a note on the account saying “transferred from” or “sold to” and the name of the collection agency.

To be clear: A charged-off balance does not relieve you of your responsibility to pay. It may change who you have to pay but it does not erase your debt or the fees. Plus, interest may continue to accrue.

As long as there is an amount listed under the charge-off, you can contact the original creditor to make payment arrangements. But once it moves to collections, you will likely have to work with the collector. Also, you should know that once a charge-off happens, the debt will remain on your credit report for seven years after the date of the original or first delinquency, whether you pay it off or not.

The same is true of collections, which are treated as an extension of your loan from the original creditor and will be deleted at the same time in seven years. Some future lenders may look more favorably at a charge-off paid notation—which is one good reason to come up with a way to pay the debt. No matter what, though, you will still owe the money.

You should know that both FICO 9 and VantageScore 3.0 ignore paid collections in their algorithms. However, you can’t count on that because many lenders still use older scoring models.

Can you still get a credit card after a charge-off?

You will probably still be able to get a credit card after a charge-off, but you may receive a higher interest rate, and your options may be limited depending on how low your score is.

There is no law requiring creditors to offer you credit. Each lender will look at your situation from their own point of view and risk tolerance. What they decide to offer you—if anything at all—is totally up to them.

If all else fails, you can apply for a secured credit card to get you back in the credit card game. These cards look and function the same as any other credit card, but they’re easier to get because you give a cash deposit as collateral upfront. If you must go this route, be sure to choose a card that reports to the credit bureaus so that the work you do to improve your credit standing is noted.

How to recover from the credit score damage

As with all things credit reporting and score-related, getting positive data onto your file after you have done some damage is the best way to rebuild your credit. This starts with paying all your bills on time, every time. I highly recommend figuring out a way to repay any charge-offs you have. Again, even if it still counts against you for a while, future lenders will see that you have been working to make it right.

Also, watch your credit card usage on any accounts you still have open and work to reduce your credit utilization to below 30 percent. The lower you can go, the better for your score. And don’t close old accounts unless you must.

The bottom line

If at all possible, you should avoid charge-offs and the resulting collections. If you need help paying your credit card bill, don’t wait to reach out to your creditor and ask about a hardship program. Although that is generally a short-term solution, it could be the answer that will keep you from facing a charge-off in your future.