What Does it Mean When a Credit Card Company Writes Off a Bad Debt?

Credit card companies guess which customers will pay them and which will not.

On occasion, you hear about a credit card company writing off a debt they have determined will never be repaid. The company sells the debt to a collection agency in hopes that the money can be recouped.

Collection Agencies

According to the Washington Post, once a cardholder has stopped paying his credit card bills, the company can sell the debt to a collection agency. This collection agency takes on the risk that they won't receive the money, but they also can use different tactics to settle the account. These agencies often call debtors many times and do their best to work out a payment arrangement.

Bonds

The New York Times notes that credit card companies can add the "bad debt" of a customer to another set of investments called a "bond." The risk to those who purchase the bonds is then spread out across the whole range of these investments. Even if the bond loses money on one credit card customer, others may repay, even in part.

Different Accounting

"Writing off" a debt also allows the credit card company to change the way a specific debt is accounted for. In this way, their investors can see how much money the company has lent and is actively receiving. (The bad debt is noted on a different line in the financial statement, of course.)

References

• The Washington Post: Credit Card Penalties, Fees Bury Debtors
• The New York Times: Banks Brace for Credit Card Write-Offs