“Bad credit” is a term used by credit reporting agencies to describe an individual credit history indicating that the borrower has a high credit risk or describe an individual as being a “high risk” for a loan, credit card, or use of utilities. A credit score or a FICO score below 650 is considered as bad credit.
Having bad credit means that negative items were reported to the three credit bureaus from the various financial institutions you conduct business with. There are many types of negative credit items that constitute sources of bad credit that we will explore here namely:
A late payment on your loans has devastating effects on your credit score because it accounts for about 35% of your total credit score as can bee seen in the bellow figure. Financial institutions such as Banks, credit card companies, and other lenders assess your payment history in 30-days increments. These financial institutions report your inability to make payments within 30 days of the due date as delinquency to any of the three credit bureaus (Equifax, Trans Union, and Experian). Delinquency notices increases if no payment is made within 60 or 90 days or more.
No one can predict how adversely late payments affect your credit score as there are thousands of different models for calculating this number. However, they are all designed to predict whether or not you will be more than 90 days late on a payment within 24 months.
Payment delinquency notices reported to the credit bureaus are not the same as the late payment notices the lender sends you. The information sent to the credit reporting agencies includes the amount of the payment due and how long it has been past due. Many times, these notices can be sent to the agencies without your ever knowing your payment was late. For this reason, late payment delinquencies affect your credit more severely with higher amounts due and the later they are.
Accumulating late payment notices can hurt your credit considerably. A few 30-day late payments on your report over time may not have as detrimental affect on your FICO score as several 30-day delinquencies or a few 60- or 90-day notices. Additionally, late payment notices can stay on your credit report for years – even after you make the payment. Some credit experts report that a single 90-day delinquency can be as damaging to your credit as a bankruptcy.
Although the time frame varies from company to company, late payments are usually sent to collections at some point. Typically, the lender notifies you of pending collection activity before your account is sent to either an in-house collection department or a collection agency for payment, giving you a chance to make a payment before an even more severe negative item is sent to the credit bureaus.Unpaid collections can lead to even worse situations for your credit score: repossessions, foreclosures, or settlements.
• Repossessions & Foreclosures: Despite the fact that the repossessed car or foreclosed home is returned to the appropriate lender, these serious delinquencies can stay on your credit report for up to seven years. The lender will argue that you signed a contract, promising to pay each month on time and you didn’t. These items have severe consequences to your credit score.
• Settlements: Occasionally, you may reach an agreement with a lender for accounts in collections to pay less than the amount due. Despite the fact that you made the agreed upon payment, you still did not live up to your original contractual arrangement with the lender and it is your credit score that suffers.
The good news is that there is help. Removing late payment notices, especially those beyond 90 days overdue, is usually very difficult. While you as the consumer have the right to dispute these notices, this venture is not always fruitful. Under the Fair Credit Reporting Act, the credit bureaus must investigate your claim within 30 days of filing. While preparing this claim, many have found more success with the help of credit professionals.
Some banks or lending companies will offer a special promotion to their customers that allow them to skip a payment every now and then. Before taking this opportunity, read the fine print to insure that skipping the payment will not adversely affect the interest due or your account standing.
In reality however, there really is no such thing as skipping this month’s payment and starting again next month. Most financial institutions apply payments made to the earliest unpaid amount due. This means not only is the skipped payment actually considered late, but so is every other payment after that – even if all other payments are on time and in full.
To correct a skipped payment problem, contact your creditors to find out what amount is actually due and pay it in full. The increased number of late payments will eventually hurt your credit rating. (Learn More About Late Payments).
Exceeding Your Credit Limits
The sections of your credit report that detail “Amounts Owed” accounts for 30% of your overall FICO credit score. These figures include loans, credit card balances, and money owed for services rendered (medical, dental, etc.). In the case of a loan, the amount owed is shown in relation to the original amount borrowed. In credit card cases, this figure is represented by the amount owed in relationship to the total available credit.
Some credit information experts claim that any amount on a credit card that exceeds 35% of the available limit can have a negative affect on your credit score. The theory behind this practice is that someone close to or actually “maxing-out” their credit card balances may not have the funds to make the payments in the future.
This process is known as “over utilization” of available credit resources. Credit agencies look at your aggregate credit balances and limits across all of your debts when calculating this percentage. For that reason, leaving credit accounts with zero balances open can improve your situation.
Closing accounts that have zero balances in good standing also will not raise your credit score. Industry experts cite that the credit history for accounts in good standing can benefit your overall credit score. The best expert advice is to keep credit card balances low and keep paid off cards in good standing open.
Declaring Bankruptcy is a Surefire to Give You Bad Credit
Many may consider declaring bankruptcy as a solution to their financial problems. The two most common reasons for filing bankruptcy is a loss of income and unpaid medical bills. Filing bankruptcy has a devastating effect on your credit report; it can remain on your credit report for up to ten years depending on the type of bankruptcy you filed.
Getting a job can help prevent bankruptcy, however, finding a solution that works may be complicated for some individuals when their finances get out of control.
Does a Tax Lien Affect My Credit?
An IRS, state or property Tax Lien can reduce your FICO score just as every other negative credit notices. Even after payment, this item can stay on your credit report for seven years. Sad news about IRS is that they can file a tax lien within ten days after notifying you of taxes due for payment. However, the IRS is not bound by law to send lien notification before filing.
The best advice is to avoid the tax lien in the first place: file your tax returns and pay any owed taxes within the appropriate deadlines. However if this problem has already affected you, there are ways that you can improve your credit score after a tax lien.
Could there be errors in my statement?
Definitely! We are all bound to make one mistake so do individuals working with financial, government or credit reporting agencies. No laws govern the type or amount of information that lenders report to credit agencies. They are also not required by law to make updates to the credit bureaus if any is available. However, the law only states such information must be accurate. Such errors can take various forms including paid collections, false charge-off , paid medical bills in your credit report.
Federal law gave individuals rights to dispute any items on their credit report. Recent updates in the Fair Credit Reporting Act have given consumers more rights and privacy. When a dispute is raised, credit reporting agencies must investigate within 30 days, after which invalid information is removed from your credit report.
Hiring a credit counseling company is one option to go by, they can help you dispute paid collection on your credit report , dispute charge-offs , and any errors on your credit report.
Identity theft is the deliberate use of another person’s identity or assumption of someoneelse’s identity. Imposters use information such as Driver’s License numbers, Social Security Number, accounts or other personal information of the individual to apply for credit cards, mortgages, or make payment for different services or product.
It is important to note that identity theft is different from “financial fraud”. In cases of financial fraud, the criminal has stolen your credit card, account number or check book to make purchases. In this case, the perpetrator is not “assuming your identity” under the legal definition.It is important to note that identity theft is different from “financial fraud”. In cases of financial fraud, the criminal has stolen your credit card, account number or check book to make purchases. In this case, the perpetrator is not “assuming your identity” under the legal definition.
Despite the distinction between these two types of fraud, the FTC (the agency regulating credit reporting) counts identity theft and financial fraud in the same category. According to a report by the FTC, both types of frauds cost business and consumers $27.6 billion and $5 billion respectively every year.
Many individuals who are victims of identity theft are unaware of the situation until they want to purchase a car or apply for a mortgage. Then, they get to know the harm these imposters have inflicted on their credit score.
If you suspect that you have been a victim of either financial fraud or identity theft, it is important to contact all of your creditors and the three major credit reporting agencies as quickly as possible. Protecting your credit score from damages is very important; however, they are various measures that can be taken to improve or correct the score if the damage has already been done. You can save yourself the time by consulting a professional credit specialist, contacting credit agencies and lenders to prove you are a victim of identity theft or financial fraud.