Money Management

A debt charge-off significantly harms your credit score. Learn about what a debt charge-off is and how to avoid it with your credit card and loan accounts. 

If you don’t make the required payments on a credit card or loan, there are several potential penalties. These start relatively small, like a late fee and possibly a reminder email. But they get progressively worse and can eventually lead to a debt charge-off, which is about as bad as it gets. Whether you’re at risk of having a debt charged off or it has already happened, here’s what this means and how to deal with it.

What is a debt charge-off?

A debt charge-off is when a creditor closes an account, writes it off as a loss for tax purposes, and stops trying to collect the debt. It will then sell the debt, typically to a collection agency. Even though the original creditor isn’t contacting you about the debt anymore, you’re still legally responsible for it.

Creditors do this with accounts that are delinquent for a long period of time. The time frame varies depending on the creditor, but credit card companies usually charge off accounts that have been delinquent for six months or longer.

Your account is considered delinquent if you haven’t made the minimum payment by the due date. Keep in mind that this includes situations where you pay less than the minimum amount. For example, if your minimum credit card payment is $100, and you pay $50, your account is delinquent if you don’t pay an additional $50 by the due date.

How a debt charge-off affects you

Charged-off accounts go on your credit report, so they have a significant impact on your credit score. They stay on your credit report for seven years, although the amount they affect your credit score decreases over the years.

The exact amount that your credit score drops from a charge-off depends on your credit history. However, it will almost certainly be a large amount. The most heavily weighted factor in calculating your credit score is your payment history. With your FICO® Score, which is the type of score most widely used by lenders, payment history accounts for 35% of your score.

For some consumers, even a single late payment can lead to a credit score drop of over 100 points. A debt charge-off is much worse and could have a far greater impact.

You’ll also need to deal with the collection agency that bought your debt. If you don’t agree to a payment plan with the collection agency, it could sue you. And finally, a debt charge-off means your account gets closed, and the creditor likely won’t approve you for new accounts in the future. That’s problematic if, say, it happens with one of the credit cards you like.

What to do about a debt charge-off

A debt charge-off is something to avoid whenever possible. If you have a delinquent account, but it hasn’t been charged off yet, the best thing you can do is contact the creditor. Explain that you’re having trouble making your payments, and see what your options are. The creditor may have a hardship plan available, such as a smaller monthly payment amount. Another option is to work with a nonprofit credit counseling agency.

If you’ve had an account charged off, your best bet for dealing with collections is to either pay the debt or settle it for a lower amount. Collection agencies buy debts for pennies on the dollar, which means they’re often willing to accept less than what you owe. And while they can sue you, that’s almost always the last resort. They’d prefer that you agree to pay or settle.

So, if you’re able to afford a certain amount per month, talk to the debt collector about setting up a payment plan. Or, if you have money saved, offer to make a one-time payment to settle the debt. You won’t be able to get the debt charge-off removed from your credit report. But you can at least get it reported as paid, which is better than unpaid.

One last important thing to note is that if you’re not sure a debt charge-off is legitimate, you can dispute it with the credit bureaus. This is a good first step to take if:

You don’t recognize the charged-off account.The debt charge-off is from several years ago, and you think it may be past the statute of limitations.

When you file a dispute, the party that reported the account needs to provide proof that it’s legitimate. If it fails to do so, then the negative mark is taken off your credit report. Any time you’re unsure of any negative items on your credit report, it’s a good idea to dispute them to see if they’re valid.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Lyle Daly has no position in any of the stocks mentioned. The Motley Fool recommends Progressive. The Motley Fool has a disclosure policy.

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Want to give your savings a lift? Read on to see how. 

At a time when inflation is soaring and many people are spending more money than ever on basic expenses, the idea of growing your savings account might seem like a joke. But it’s important to try to boost your cash reserves, especially if you feel you’re lacking in that area.

A recent SecureSave survey found that 67% of Americans could not cover a $400 unplanned bill from savings. If you’re in a similar boat, it means you’re vulnerable to racking up costly credit card debt the next time an unexpected expense pops up. And that’s far from ideal.

The good news, though, is that there are steps you can take to boost your savings even at a time when living costs are so high. Here are three worth looking into.

1. Fight for a raise

Today’s labor market is fairly strong, and some companies are still struggling to attract and retain talent. That gives you a prime opportunity to (nicely) demand a raise. And the higher your paycheck, the more savings opportunities you’ll have.

Of course, your boss isn’t going to just approve a raise to appease you. You’ll need to really prove you’re worthy of one.

Start by listing your accomplishments from the past year. If you can prove you’ve gone above and beyond your job description, that alone might make the case for higher pay.

Also, do some salary research to see how your wages stack up. If you can show that you’re statistically underpaid, that alone might help you make the case for a higher salary.

2. Take full advantage of your Costco membership

Many people use their Costco memberships to save money on groceries. But there are so many more savings opportunities you can benefit from at Costco.

For one thing, buying clothing at Costco could be a money-saver, as could purchasing electronics. And you can also look to Costco for things like prescriptions, eyeglasses, and even furniture for your home. So the next time you pop into Costco to buy dairy products and meat, think about some of the needs on your list, and explore your options for purchasing them there.

3. Do a subscription inventory and cancel those you can do without

Many of us have subscriptions and memberships we pay for month after month. You can boost your savings by canceling those that are no longer offering you the same amount of value they once did.

Let’s say you signed up for Netflix during the pandemic when everyone was stuck at home and you were bored senseless. If you’re barely watching any TV these days, then it’s probably not worth paying for Netflix when you can bank that money instead.

In fact, you may have subscriptions you’re paying for that you’ve completely forgotten about. So comb through your last six months of credit card and bank statements to see what you’re signed up for, and start making cuts as appropriate.

It’s not easy to save money at a time when it costs so much to do things like buy groceries and cover utility bills. But if you make these moves, you may be pleasantly surprised at how your savings are able to grow.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has positions in Netflix. The Motley Fool has positions in and recommends Costco Wholesale and Netflix. The Motley Fool has a disclosure policy.

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Your auto lender has the right to repossess your vehicle. Keep reading to learn how technology could make this even easier, and how to avoid it. 

While we don’t quite have the future promised by The Jetsons (I’m still waiting on my personal jetpack), we do have video phones and increasingly, new cars have vehicle autonomy features. This is more popularly (if less accurately) known as “self-driving,” and many auto manufacturers have been investing in this technology, which promises to revolutionize our cities, commutes, and everyday driving activities.

Wait, how could a car repossess itself?

Ford offers its BlueCruise package on four different vehicles. These cars are not capable of driving themselves, but under the right road conditions (such as highway driving), they can help drivers remain centered in a lane and adapt speed to the traffic around them. But as recently reported by NPR, Ford has filed a patent application detailing how an autonomous car could be more easily repossessed by a financial institution if the owner failed to keep up with their payments.

The patent notes that the vehicle’s onboard computer could take actions (via the lender) such as reminding the owner that payments are due, disabling functionality of some systems in the vehicle (such as air conditioning or the media player), or even moving the vehicle itself to a repossession agency or the lending institution. A Ford representative interviewed by NPR noted that Ford doesn’t have any immediate plans to implement this patent, but it is worth keeping in mind that technology like this could make the consequences of not keeping up with auto loan payments a lot more immediate and annoying. As it is, having your car repossessed isn’t something you want to happen.

How does car repossession work?

Your contract with your lender should outline how and when your vehicle can be repossessed, but in general, this becomes a risk when you’re behind on your payments. The vehicle may be physically removed from your custody, or a “kill switch” in it may be activated, rendering you unable to start the car. The lender can repossess your car at any time, with no notice, but isn’t allowed to “breach the peace” to do so. Breaching the peace could involve taking the car from a closed garage or using force (or even threatening it) to get the car back.

In any case, if your vehicle is repossessed, the lender will either keep it or sell it to recoup its losses, such as at an auction. You can get the car back by paying what you owe on the loan (along with any fees charged for the repossession) or bidding on it if it’s put up for sale at auction. Laws vary by state, but ultimately, you do not want to go through a car repossession. It’s not a pleasant experience.

Communicate with your lender to avoid repossession

If you’re struggling to keep up with your auto loan payments, your first call should be to your lender. It can likely help, perhaps by allowing you to defer payments if you’re experiencing a temporary financial setback. You might be able to refinance the loan if your interest rate is making it hard to afford payments. At worst, you might have to get rid of the car, but selling it yourself is far less drama and trauma than having it repossessed.

The future is now, and if the thought of your autonomous car someday driving itself back to the lender’s lot has you in a cold sweat, do your best to keep up with your loan payments and reach out to your lender if your finances take a turn for the worse.

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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

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Choosing a credit card isn’t always easy, but soon there may be a simpler way to find the best card for you. Read to learn more. 

If you’ve ever gone shopping for a credit card, you know it can be overwhelming. There are so many different options and criteria that go into choosing the right card for your needs. But soon, there will be a federal tool available that may make this process much easier. The Consumer Financial Protection Bureau (CFPB) is asking banks to provide more information, such as who qualifies for which cards, the interest rate based on credit scores, and more. This will help the CFPB create a comprehensive database to help consumers comparison shop for the best credit cards.

How it works

The Fair Credit and Charge Card Disclosure Act of 1988 mandates the gathering of information twice a year from the top 25 credit card issuers, as well as 125 other institutions. However, banks typically only offer information on their most popular credit cards. In addition, the information provided is not the most user-friendly. This can lead to frustration and confusion for those trying to decide which credit card to choose.

As a result, the CFPB is asking banks to start reporting more details on the types of credit card plans they offer, interest rates, promotional terms of balance transfers, introductory rates, cash advances, and more. The top 25 credit card issuers will have to answer questions for all their credit cards instead of just their most popular products. All other institutions will be able to voluntarily submit information about multiple products.

The intent for the enhanced credit card issuer survey is to empower consumers to easily compare features like interest rates, annual fees, rewards, introductory interest rates and penalty interest rates, when shopping for a new credit card. Additionally, the CFPB wants banks to provide details on what qualifications consumers need in order to receive a certain card — such as minimum credit scores — so consumers can get an idea of their chances of being approved before they apply.

Why this matters

Every year, Americans pay $120 billion in credit card interest and fees, adding to $1 trillion in total credit card debt. With credit card interest rates skyrocketing above 20% in 2023, a small percentage change can greatly affect household finances. It is important for Americans to be able to accurately compare and find the best credit cards for their needs.

Smaller credit card issuers and relationship banking institutions often offer lower credit card interest rates, but they can struggle to compete with larger issuers. The updated survey will now allow these institutions to showcase their credit card offerings and finally level the playing field.

This new system should also help protect consumers from predatory practices by providing more transparency regarding how credit cards are marketed and sold. For example, if banks fail to disclose all the fees associated with a particular card, then potential customers should be able to spot this discrepancy when looking at different cards on the CFPB’s website.

Currently, there are close to 600 million credit card accounts in the U.S. It can be difficult for people to find the card that best suits their needs. With this new system from the CFPB, however, choosing a credit card could soon become much simpler. Not only will users have access to more detailed information about which cards are offered by which banks (as well as what qualifications they need in order to qualify), but they’ll also be able to quickly compare features like annual fees, rewards programs and interest rates in order to find the perfect fit for their financial situation.

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If you’re using the wrong credit or debit card, it could be costing you serious money. Our experts love this top pick, which features a 0% intro APR until 2024, an insane cash back rate of up to 5%, and all somehow for no annual fee.

In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.

Read our free review

We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.

 Read More