Credit Card Chargeback: What Does It Mean and What Should You Do About It?

Has a creditor told you that your debt is about to be paid off? Did the bill collector make it appear that you will be financially ruined if you allow this catastrophe to occur? If you’re behind on your bills, unable to keep up with your credit card payments and other debts, sooner or later you’ll hear a creditor representative threaten you with the dreaded “cancellation.” So what is a cancellation anyway? Should you be worried? What are the consequences of this mysterious event?

I’ll start by explaining what a cancellation is NOT. Because the term includes the word “fee,” many people mistakenly think it has to do with the creditor’s cancellation of the account. In other words, you can no longer “charge” anything to your credit card. But it’s not the same thing at all, and most banks will revoke collection privileges about 2-3 months before the deadline we’re talking about here.

What banks and collectors call a “write-off” is the point at which the creditor writes off the account balance as a “bad debt.” It usually occurs after six months of non-payment. After that, they no longer count it on their books as an asset. You still owe the money, of course. And they will certainly make continual attempts to win it back. But the creditor has been forced by accounting rules to zero out the debt on his accounting books. For causing this loss, you will be punished by placing a derogatory mark on his credit report. A “charge off” is a serious negative mark, to be sure, but it’s not the financial ruin that debt collectors would like you to believe it is.

Should cancellations be avoided if possible? Indeed. Does the prospect of a cancellation mean you need to panic if you have no way to pay the bill? Do not! Is it the end of the world if the account has already been cancelled? Do not! Too often, collectors make a cancellation sound so bad and put so much pressure that people give in and make payment commitments they can’t keep. Collectors often demand payment via postdated checks, and this often leads to bounced checks and even worse financial problems. Most of us are brainwashed by the banks and the media on the subject of credit. Sure, good credit is important. But committing to payments you really can’t afford just to preserve your credit is like watering your lawn while your house is on fire.

Here are some simple rules to follow when trying to avoid a cancellation that hasn’t happened yet:

* Don’t be intimidated or threatened by pre-cancellation collection tactics. Keep a cool head and don’t take it personally when collectors try to get under your skin.

* Call your creditor to find out the minimum payment needed to avoid discharge and subsequent payments to keep the account in good standing in the future. Do not commit to this payment (or series of payments) unless you are sure you can meet it.

* Negotiate a lump sum agreement at 50% or less if you have the resources, or a training plan for monthly payments you can live with.

* Don’t let collectors talk you into using postdated checks or giving out your checking account details over the phone. Instead, make payments by cashier’s check or money order.

* Do not make payments based on a verbal arrangement. Get the agreement in writing and signed by a representative of the creditors who has the authority to approve the restructuring plan.

What should you do if you simply don’t have the money to rescue the account from discharge or the creditor has already discharged the account?

* Take a deep breath and relax; the sky will not fall on your head just because you had a punishment.

* Please note that you still have an opportunity to resolve the matter by dealing with the original creditor or collection agency assigned to the account.

* Negotiate a lump sum settlement with the creditor or collection agency. Again, aim for 50% or less and request that the cancellation be removed from your credit report as a condition of the settlement. (Most creditors won’t agree to this, but it’s worth asking anyway. Make sure they update your credit report to show that the matter has been resolved and the account has been satisfied.)

* If you can’t reach an agreement with the collection agency assigned to your account, wait until you move on to another agency! Eventually, it will be assigned or sold to a team that you can deal with to clear things up.

In short, a cancellation is not the end of the world. It should certainly be avoided if possible, but not at the risk of making things worse by committing to payments you’re not sure you can meet. Just remember that the creditor doesn’t want to see a discharge any more than you do, so use that knowledge to your advantage to come to a mutually acceptable agreement. Get everything in writing, don’t reveal your checking account details, and follow up to make sure the creditor correctly reports the matter on your credit report. You’ll find that it’s easier than you think to resolve a cancellation situation before it happens, or clean it up if it’s already happened.