What is a Charge Off?

A charge off is a financial accounting entry that a lender, usually a bank or credit card company, makes when a borrower has not paid the required amount due on a loan or other debt for an extended period of time. A charge off represents the lender’s decision to stop attempting to collect further payments from the borrower and to write off the debt as a loss for accounting purposes.

Effect on the Borrower

When a lender charges off a debt, it will typically report the charge-off to the borrower’s credit report by the three major credit bureaus: Equifax, Experian and TransUnion. A charge-off is viewed as a very negative indication for the borrower, and can seriously damage the borrower’s credit score. The drop in credit score can result in the borrower being shut out of certain types of financing and being subjected to higher interest rates, higher fees, spotty service or being denied altogether.

Repercussions for the Lender

When a bank or other lender charges off a debt, it has to accept the fact that it may never recover the full amount due. The lender can continue to attempt to collect the debt, but it is usually done using third parties such as collection agencies, who may be more aggressive in their tactics and may threaten legal action. The lender may also sue the borrower for the amount due, but even if successful, the lender may find it difficult to collect the full amount due.

In addition, the charge-off becomes part of the lender’s financial reports, which can affect its overall financial position by increasing its provision for loan losses. In turn, this can affect the lender’s ability to lend in the future, either due to lack of funds or to a decreased ability to obtain capital from investors.