02-Aug-2017 written by : FSI-Team
"Charge Off" is quite a confusing terminology. Notionally while it may seem to mean that there is no outstanding against the particular account where it is shows, factually it is a negative status. Let us understand in detail what it means and how does it impact you and your credit life?
So what is a charge off? Just like any other business, the lending institutions have their profit and loss account. The loans are termed as "asset" for all banks where they make money through the interest earned on the loans and other forms of credit. On one hand where they make money by the borrowers’ timely payments, they run losses in case the borrower is unable to repay the debt. When the lending institution is unable to collect money from the borrower and writes it off in its books, the account gets termed as charge off and reflects as a written off account on the credit report.
Practically speaking, a charge off is a loss for the lender.
The asset as is known, does not get to seize immediately. After all, the bank does expect the borrower to return the money back. However, there is a limit to the time that it can continue to have it in the books as an asset. Under the guidelines issued by the Reserve Bank of India, all lending institutions have to proactively book a loss in their books in case they are unable to collect any money for 180 days.
Therefore, upon completing 6 months of non-payment, the accounts get reported as a charge off to the credit bureaus.
But that may not be true in cases. A few banks in fact take a charge off even earlier and book a loss if they are not able to collect for 90 days.
Technically if the account has been provisioned for and booked as a loss in accounts, the account gets zeroed on outstanding. But it does not mean that the bank has also given up the right to collect the defaulted amount. Practically, the bank does not stop following upon and the collection efforts get highly rigorous on the charged off cases. The lenders have the right to collect the amount from you to the last decimal, including the charges, late interest etc.
This is the most important thing that you should know. While the banks may still not be able to follow upon with you for variety of reasons but it does not mean that you are left unaccounted on this front. The account with delinquency gets updated as a written off account to the credit bureau, as mentioned earlier as well in this post.
So, if you, hypothetically speaking have defaulted on your credit card, the same will reflect as a written off account. This is one of the negative flags that not only immediately impacts the credit score adversely but in the long run has the potential to stop you from availing a loan. This means that at the time of need, both on business or personal front, the credit will be inaccessible to you and this can lead to complications both in your personal and professional lives.
Unfortunately, there is little that you can do once the account gets updated with a written off status. The only option that you would be left with is to contact the bank and understand the total outstanding amount and pay it off. You may not have been able to pay in past on account of some exigency, but the bank should be repaid in full as soon as you are in a position to pay off the due debt.