The Difference Between a Charge-off & Default
Failing to make debt payments as agreed will typically cause your creditor to initiate collection activity to recover your delinquent amount. In some cases, the letters you receive from a creditor or collection agency may refer to the loan as "in default." In other cases, your creditor, a collection agency or your credit report may refer to the account as a "charge-off."
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Length of Delinquency
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MerriamWebster.com defines default as "a failure to pay financial debts" — technically, if you are late with even a single payment, you have defaulted on your debt repayment obligation. However, lenders typically do not consider a loan in default the day after your payment is due. The length of delinquency required for default varies by lender and type of loan — for example, a mortgage lender might consider your loan in default after two or three missed payments. Conversely, a charge-off typically occurs when the loan is 180 days or more late, according to Steve Bucci, author for Bankrate.com.
Differences for Lender
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A loan default represents a potential financial loss for the lender, because you may continue falling behind on your debt. However, a charge-off represents a realized financial loss. A charge-off is an accounting procedure in which the lender writes the account balance off as bad debt, according to Bucci. Charge-offs are reported to the IRS to reduce the lender's tax liabilities. Conversely, a delinquent debt that has not been charged-off does not represent a tax write-off for the lender.
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Ability to Obtain Future Credit
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Defaulted and charged-off debt can both cause damage to your credit and negatively affect your ability to obtain future credit cards, loans and lines of credit. However, a charge-off is the top reason for credit denial, according to Bucci. Some lenders, particularly mortgage lenders, will require you to pay off a charged-off account before approving a loan application.
Considerations
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Although a lender considers a charged-off account bad debt, a charge-off does not mean that the lender has forgiven or cancelled the debt. The lender or a collection agency may pursue collection of both defaulted and charged-off accounts through letters and phone calls, and may initiate a lawsuit against you to recover the debt. If the collector or lender wins a judgment against you as a result of a lawsuit, it may use collection strategies such as property liens, seizure of bank account funds or garnishment of your earnings as permitted by your state's laws.
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