Delinquencies, Defaults and Charge-Offs… What’s the Difference?

Delinquencies, Defaults and Charge-Offs… What’s the Difference?
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Mike Randall
By: Mike Randall
Posted: March 3, 2015
Experts share their tips and advice daily on BadCredit.org, helping subprime consumers navigate the world of personal finance.

As most people know, falling behind on your credit card payments is bad. Just how bad depends on how far behind in your payments you actually get. The more time that goes by, the more frequent the phone calls and late payment notifications become.

Soon you start hearing terms like “delinquent” and “default” from the voice on the other end of the line.

So just what does it mean to have a credit card in a delinquent status? And what about defaults and charge-offs?

Actually, these are very specific terms that banks use in order to identify how much time has elapsed since the last payment was made, and whether or not they can expect to collect on the outstanding debt at all.

Delinquencies

Delinquent Account

Roughly 2.5 percent of Americans had delinquent credit card bills in 2013, according to CardHub.

Let’s start with delinquencies. A credit card company usually considers an account to be delinquent if no payment has been received for 30 days beyond the due date. At the 60 to 90 day point, the account may be considered severely delinquent. It will also be reported as delinquent to the credit reporting agencies and will show on your credit report.

Defaults

The term “default” is a little less specific, as many credit card companies have moved away from using it to describe overdue card payments. In the strictest terms, an account is in default if you haven’t made a payment by the due date. However, the term has come to be used to describe any debt that the card issuer no longer expects to be paid in full.

We would never recommend defaulting on a loan unless making payments on it would threaten you or your family’s well-being. If that’s the case, you may want to consider bankruptcy.

Charge-Offs

When a credit card company has decided that the outstanding debt they’re owed is unlikely to be paid at all, they will typically “charge-off” the debt.

Data shows after that period of time, it is highly unlikely the debt will ever be collected. Also, not coincidentally, 120 days is the length of time after which a debt is eligible to be sold to a debt buyer or third party collection agency.

What this means to the card issuer is the entire amount of the outstanding debt, plus interest and fees, goes onto their books as an uncollectable debt.

Debt Collector

It’s much more unpleasant to work with a debt collector than your original lender.

According to federal regulations, installment loans (like student loans) must be charged-off after being delinquent for 120, while revolving credit accounts (i.e, credit cards) must be charged-off after they’ve been delinquent for 180 days.

At this point, the lender could keep trying to collect from you, hire a debt collection service or sell your debt to independent debt-buyers to collect from you — unless, of course, they take you to court first.

If a judge rules against you, he or she can order up to 25 percent of your wages after deductions. If it’s a student loan, the U.S. Department of education can garnish up to 15 percent of your income wages without a court order.

What happens to your credit?

What it means to the consumer is an entry on their credit report that states the debt was charged off and the entire amount owed. Once reported, a charge-off will appear on your credit report for up to seven years.

If the debt that has been charged off is sold to a debt buyer or collection agency, another entry is placed in your credit report that states the debt has gone to collection. At this point, the only thing that can remove these two entries is to pay the entire amount in full – in which case the credit report entry will read “charge-off recovery.”

Suffice it to say, none of these scenarios is pleasant, and should be avoided at all costs. The best course of action if you find yourself delinquent on your payments is to talk with your card issuer.

Typically they are willing to work with card holders and set up a payment plan. They don’t want your account to be charged off any more than you do, so explain your situation and why you have been unable to pay. You may find them more accommodating than you think.

If you need help fixing your credit, a credit repair firm may be able to help.

Photo credits: budgetdivorcecenter.com, allmandlaw.com, biz911.com