A write-off, also known as a charge-off, is the most negative disposition of an unsecured debt listed on a credit report. In the case of a secured debt, the default will be listed as a foreclosure or repossession. With unsecured debt such as credit cards and signature loans, a lender will report a write-off when they have determined that the chances for repayment are no longer realistic. By posting a write-off, the lender is then able to list the default as a loss for tax purposes. Few things are more damaging to a person's credit profile than a write-off.
A healthy credit rating is necessary to secure home loans, car loans, and personal loans. A single write-off on a credit report can ruin a consumer's chances at receiving an affordable loan with a preferred interest rate. Write-offs indicate not just an inability to repay a debt, but an underlying unwillingness to repay that debt, and lenders take a very dim view of customers with multiple write-offs on their credit reports. Write-offs also have a severe impact on a consumer's credit score.
The function of a write-off is to provide the lender the ability to claim the unpaid debt as a loss for tax purposes. Once a debt is written off by an original lender, the lender takes the tax break and still tries to collect. In addition to the damage the write-off does to a person's credit, the debt will often go into collections, causing another derogatory entry in the person's credit profile and opening the door to aggressive collection practices. This makes the write-off a lender's “nuclear option”.
Lenders will generally provide at least six months for borrowers to make a payment on a given debt before writing off the debt. After six months of non-payment, the lender will usually declare the account charged off and turn it over to collections. The write-off will appear on the borrower's credit report within 60 days.
Obviously write-offs have a severe impact on a borrower's credit score. Just how severe varies from one credit reporting agency to the next based on their individual scoring formulas. However, all credit reporting agencies attach the highest scoring values to the most recent credit events in a consumer's history, so a new write-off is one of the most damaging events possible.
Once an account has been written off, it may not benefit you to later pay off the account, and doing so can actually hurt your credit score. An account charged off six years ago has little effect on your current credit score, but you re-activate the negative account by paying it off. Even if you bring the outstanding balance to zero, it shows a recent negative account with a zero balance and damages your credit score all over again.
Dave Guilford has been a freelance newspaper and magazine writer for more than 10 years. As a former stockbroker, commodities trader and life insurance agency owner, he writes on personal finance, investing, insurance and retirement planning. A former international yacht racer and yacht brokerage owner, Guilford is a frequent contributor to "BoatU.S. Magazine." His work has also appeared in "Latitudes & Attitudes Magazine."