Credit card cancellation – 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 look like you will be financially ruined if you allow this catastrophe to happen? If you are behind on your bills, cannot keep up with your credit card payments and other debts, sooner or later you will hear a representative of the creditors 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 “charge”, many people mistakenly think that it has to do with the termination of the account by the creditor. In other words, you can no longer “charge” anything to your credit card. But it’s not the same at all, and most banks will revoke collection privileges around 2-3 months before the deadline we’re talking about here.
What banks and bill collectors call “write-off” is the point at which the creditor writes off the account balance as “bad debt.” It usually happens after six months of default. 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 continuous attempts to collect it from you. But the creditor has been forced by accounting rules to zero the debt on its books. For causing this loss, you will be punished by placing a derogatory mark on your credit report. A “write off” is a serious negative mark, to be sure, but it is not the financial ruin that debt collectors would like you to believe it to be.
Should cancellations be avoided if possible? Certainly. Does the prospect of a cancellation mean you have 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 canceled? Do not! Too often, bill collectors make a cancellation sound so bad and put so much pressure that people give in and make payment commitments they can’t meet. Collectors often require payment through post-dated checks, and this often leads to bad checks and even worse financial problems. Banks and the media brainwash most of us on the issue 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 burning.
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-charge 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 necessary to avoid cancellation and subsequent payments to keep the account current in the future. Do not commit to this payment (or a 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 compensation plan for monthly payments that you can live with.
* Don’t let bill collectors convince you to use post-dated checks or provide 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 deal in writing and signed by a creditor representative who has the authority to approve the restructuring plan.
What should you do if you simply don’t have the money to redeem the account from a cancellation or if the creditor has already canceled the account?
* Take a deep breath and relax; the sky won’t fall on your head just because you had a burden.
* Please note that you still have an opportunity to resolve the matter by negotiating with the original creditor or collection agency assigned to the account.
* Negotiate a lump sum agreement with the creditor or collection agency. Again, aim for 50% or less and request that the cancellation of your credit report be removed as a condition of the deal. (Most creditors won’t agree with this, but it’s worth asking anyway. Make sure they update your credit report to show the matter has been resolved and the account has been satisfied.)
* If you can’t come to an agreement with the collection agency assigned to your account, wait until you go to another agency! Eventually, it will be assigned or sold to a team that you can deal with to clear up the matter.
In short, a cancellation is not the end of the world. It should certainly be avoided if possible, but without risking making things worse by committing to payments that you are not sure you can meet. Just remember that the creditor doesn’t want to see a cancellation any more than you do, so use that knowledge to your advantage to reach 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 will find that it is easier than you think to resolve a cancellation situation before it happens, or to clean it up if it has already occurred.