How a Debt Write-off / Charge-off Affects Your Credit Score

Reader Question: Is my credit score hopeless if I have write-offs?

For the benefit of all readers, I'd like to explain the terminology being used here, with regard to the write-off and charge-off process and how it affects your credit.

Let's say I have a store credit card that I haven't made payments on in some time. In other words, I have unpaid debt associated with that card. A lender / creditor will try to recoup the payments I owe them for a certain period of time. They will send me letters about the overdue balance, and they will probably turn the account over to a collection agency at some point.

After a few months of trying to get me to pay the debt (and usually at the six-month point), the store will write off the account as bad debt. This is like say, "This person has not paid what they owe, nor do we expect them to at this point. So we will 'eat' the loss." They will then report the bad debt to the credit reporting agencies as a charge-off account. This is when it goes on your credit reports as a negative entry. And since your credit score is based on the information within these reports, this negative item can lower your credit score.

How much it hurts your score depends on several factors, so there's not way I can say exactly. You can be sure your credit will take a hit, though, and you can find out how much by requesting your scores online. By law, negative items such as unpaid debt can stay on your credit report for a period of up to seven years. After that, it must come off.

Keep in mind, also, that a debt write-off and charge-off does not mean the debt is forgiven. You still owe it, and the collection agency and/or the original creditor can still come after you to settle the debt.