Is it Better to Charge Off Your Credit Card or Make a Payment Plan?
If unfavorable financial circumstances leave you with a credit card account in default, ignoring the debt will cause it to become an even greater problem. Negotiating a payment plan with your credit card company will prevent the company from charging off the debt. While late payments hurt your credit rating, the effects of a charge-off will damage it even further.
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Facts
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Only the original creditor can officially "charge off" your debt. Most credit card companies charge off unpaid accounts after six months. Once a charge-off occurs, the credit card company will close the account and report the charge-off to the credit bureaus. The Fair Credit Reporting Act notes that negative information within your credit file, such as a charge-off, will remain a part of your credit report for seven years. Thus, any future lender or creditor who requests a copy of your credit report will see the charged-off account and take it into consideration when evaluating your credit application.
Significance
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Negotiating a payment plan with your credit card company does not erase the adverse record of your late payments, but it prevents the credit card company from charging off the debt and selling it to a collection agency. Once a collection agency owns the debt, it will not only further damage your credit by inserting its trade line on your credit report, it will pursue you mercilessly for the debt -- often adding additional interest charges and fees to the unpaid balance.
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Features
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Your credit card company is unlikely to allow you to pay more than the minimum payment due on your credit card account -- even if you are at risk of a charge-off. Most credit card companies, however, would rather work with you to correct the problem than charge-off the account and lose money by selling it to a collection agency. Consider asking for such provisions as reduced fees or a lower interest rate to help you pay down the balance more quickly.
Misconceptions
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Many consumers believe that closing a credit card account while participating in a payment plan is a smart financial move. In reality, closing your credit card account can hurt you more than help you.
The amount you owe on each of your credit cards compared to your spending limit is known as your "debt-to-limit ratio." This ratio plays a role in determining your credit score. Closing credit card accounts doesn't erase your debt -- but it does erase your spending limit. This, in turn, adversely impacts your credit rating. The age of your credit card accounts also factors into your credit score. Thus, closing long-standing accounts -- even after you've paid them off -- can prove detrimental to your credit.
Considerations
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If preserving your credit rating isn't enough motivation to negotiate immediate payment arrangements with your credit card company, protecting your assets should be. Your credit card company, or any company that purchases the debt, has the right to sue you for debts you don't pay. Many states, such as California, allow creditors to place liens on debtors' homes and personal property after a successful lawsuit -- giving your creditor the legal right to seize your assets in lieu of your unpaid credit card debt.
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