Usually, a charge off occurs when an individual doesn’t make payments – usually for six months. This is more than just a credit card status though. It affects your relationship with your credit card issuer, your general credit standing, your ability to get a credit card or loan approved and other credit-related services.
How Charge Offs Happen:
Once you’re approved for a credit card, you agree to the terms dictated by the card issuer. For example, you could agree to a minimum payment by a certain date each month. Missing this minimum credit card payment continuously for six months will put your card in default. Subsequently, the card issuer reports the default as a charge off to the credit bureaus after closing your account.
Within the six months building up to the default, the late payment status will also be reported to the credit bureaus, but your credit score will begin suffering earlier as a result of those late payments. New credit card and loan applications will likely be denied since creditors will probably think that you are at risk of defaulting on new credit responsibilities. Some creditors even go as far as rejecting applications who haven’t cleared up the charged off balance.
Consumer Debt in America
These days It seems like Americans just keep slipping further into debt. This is according to one of the key indicators used by analysts which is the Q2 2018 Household Debt, and Credit Report was done by the New York Federal Reserve. This report indicates that the grand sum of household debt in America has continued to increase for the 16th quarter in a row.
Currently, the consumer debt is a little below the $14 trillion ceiling with a whopping $9.43 trillion of that being categorized as housing debt.
And if there were any upside to this, it would be the single economic index that seems to indicate that Americans are currently handling a part of the debt load well considering the fact that credit card default rates are currently reducing.
The S&P/Experian Consumer Credit Default Composite Index which is a metric of the complete default rates across credit cards, auto loans and first, second and third mortgages with each indicator assigned to a unique index. The composite index indicates that while overall default rates have remained constantly flat over the last three years, the credit card default index has experienced dips in May, June, and July.
An Advantage to Good Credit
The Composite Index has been constantly fluctuating between 0-8 and 1 since April 2015. To provide a bit of context, it is important to note that the index peaked at 5.51 in May 2009 during the lowest points of the housing crisis and the recession that followed. As a result of the slow economic recovery, the index plunged below 2.0 in March 2009 and went further down below 1.0 over the next three years. Many believe this caused the mortgage and auto loan indexes to follow a similar track over the same time period.
The credit card index reached a high of 9.15 in April 2015 and experienced a dip at a steady pace to 2.49 in December of the same year. Since then, there have been repeated waves of increases and lesser waves of decreases. At the moment, experts believe we are in a decreasing wave, and as of July 2018, the index dipped to 3.56 from Aprils 3.86
So, what does this mean? Well, it means that the index has changed logically to reflect the tightening of credit going on. This could be expected after the post-recession surge in defaults; credit tightened to a point where only borrowers with rock-solid scores could get loans leading to a reduction in risky loans and defaults. Now, credit cards are more common and represent a wide category of risk levels making the credit card index more prone to fluctuations.
Debt Levels are on the Rise
Although credit card defaults may be experiencing a decline at the moment, it is clear that credit card debt is not. According to the Household Debt and Credit report, credit card debt increased by $14 billion in the second quarter.
Currently, credit card debt growth is hitting households hard because of the relatively high interest rates. The current average APR (annual percentage rate) is almost 17% – making it extremely higher than most mortgage rates and slightly higher than the interest rates of most of the other types of debt. Also, the penalty APRs levied after a payment is missed can go as high as 30%.
If you tend to carry balances often, it is a good idea to ensure your credit score is as high as possible to get the best interest rates. Check your credit report regularly for errors or signs of fraud that could cause your score to drop without your knowledge. You can check your free credit score and credit report card at credit.com, updated every 14 days. Also, make sure that all payments are made on time as they are the most significant impact on credit scores.
What You Can Do to Keep Your Debt from Rising
One of the best ways to avoid interest charges and unnecessary credit card debt is to make sure you never charge more to your card than you can pay at the end of each month. Although that may not be practical in your case, it is necessary to formulate a plan that will help manage and pay off all balances to keep your debt in control.
Finally, when dealing with multiple debts, it is usually a good idea to strategize over which debts to pay off first – whether it be the debt with the lowest balance or the debt with the highest interest rate. If you can afford to pay extra against the principal on mortgages and other installment loans, you can do this to save on interest, but remember, it is also a good idea to create an emergency fund to help deal with any financial crises so that you can avoid putting them on credit cards.