Credit reporting is complicated to the average consumer, and the barrage of negativity can seem overwhelming. Understanding these citations and their consequences is the first step to avoiding future damage. Take some time to review the information below. The result will help you on the path to credit health.
- When debt outweighs resources, many people are forced to file for bankruptcy. A few reasons to file include chronically overdue accounts, long-term loss of income and uncooperative lenders. There are two main types of personal bankruptcy:
- Chapter 13: Known as the “wage earner’s” bankruptcy, Chapter 13 is for consumers who are employed but cannot meet minimum debt payments. Under trustee supervision, Chapter 13 filers usually have three to five years to repay qualifying debts based on a restructured plan. A Chapter 13 citation will remain on your credit report for up to seven years.
- Chapter 7: Chapter 7 bankruptcy is often a last resort. When you are deep in debt and have no way to repay, discharge and asset liquidation is usually the next step. Although many people believe Chapter 7 offers a clean slate, not every debt qualifies for Chapter 7 protection. Eligibility to file is based on:
- Analysis of your bills and assets
- Determining which debts must be paid
- Determining which assets to use to cover unqualified debts
A Chapter 7 citation will remain on your credit report for up to 10 years.
Regardless of type, filing for bankruptcy can cause serious credit score damage. Talk to a professional before considering this step.
- Charge Off. When you haven’t paid your bill for 180 days or more, your creditor will usually write off your debt on their taxes as a loss, also known as a charge off. While it may seem like your debt is forgotten, the remaining balance is usually sold to a collection agency that will attempt to secure payment. A charge off will drastically hinder your credit reports’ payment history, causing damage for up to seven years.
- Civil Claim. If you fail to pay a debt, your creditor may file a lawsuit against you, resulting in a civil claim citation on your credit report. While the citation may be updated as “satisfied” once the issue is resolved, it is likely to remain on your credit report for seven years.
- The star of financial stability is credit, or the act of using borrowed cash to fund purchases. There are two main types of credit:
- When an account has a maximum limit and no payoff date, it is revolving credit. It provides flexibility when it comes to spending and repaying debts either all at once or in minimum increments, carrying the remainder over from month to month. Common types of revolving accounts include credit cards and home equity loans.
- An account with a fixed payment period is an installment loan. Monthly payments are identical from month to month, allowing predictability when it comes to budgeting. Common types of installment credit include auto loans, student loans and 30-year mortgages.
When used correctly, these accounts have the power to boost your score. When used carelessly, they will accomplish the opposite.
- Homeownership can make or break a credit report. Failing to pay your mortgage will result in foreclosure proceedings, often resulting in legal action and eviction and definitely resulting in long-term credit damage. A foreclosure will devastate your credit score for up to seven years, and you’ll have a difficult time securing another mortgage in the meantime.
- Included in Bankruptcy. Discharging debt in bankruptcy doesn’t erase it from your credit report. In fact, qualifying accounts will close with the notation, “included in bankruptcy,” a distinction that will remain for seven years. Unfortunately, the damage to your credit score will be significant.
- Unpaid credit bills, child support, property taxes and utilities: all of these are examples of potential litigation and credit score damage. A judgment issued against you is public record and will remain on your credit report for up to seven years. Depending on its severity, a judgment can shave hundreds of points off your credit score.
- 30-day Late Payment. A 30-day late payment occurs when you fail to pay your bill at the end of the month, i.e., after 30 days. Popular myth suggests that a 30-day late payment will not affect your credit, however, even a small infraction can cause damage if your creditor chooses to report it to the bureaus, especially if the balance is outstanding. This type of situation could hurt your credit score by 100 points or more. To make matters worse, a delinquency –no matter how brief—can remain on your credit report for up to seven years. Play it safe: pay your bills on time.
- 60-day Late Payment. Two failed payment periods results in a 60-day delinquency. Failure to pay your bills for two consecutive months will almost certainly cause drastic damage to your credit score by dampening your payment history and even your credit utilization ratio. You’ll also face fees and a potentially higher interest rate.
- 90-day Late Payment. Three failed payment periods places you in the 90-days late category. By now, your credit has suffered significant damage and you are sinking deeper into debt.
- 120+day Late Payment. Four failed payment periods places you in dangerous territory. An outstanding debt of 120 days or more is likely to move into collection status, a consequence that can cause long-term credit damage and reflect poorly on your ability to manage credit and finances.
- When an account is chronically overdue—usually 180 days or more—it is listed as a collection. This occurs when your lender redirects the account to their in-house collection department or sells the debt to another agency for a fraction of its worth. A representative will contact you and attempt to recoup the remaining debt.
Collection accounts are serious in the world of credit, causing as much damage as a bankruptcy citation in some cases.
- A lien is a public record attached to a mortgage when you fail to pay a creditor for goods or services. Placing a lien on your home prevents you from taking out a second mortgage or home equity loan. If you decide to sell, your creditor must be repaid by any profit earned. There are two common types of liens:
- Judgment lien: When a creditor wins a court case against you, they may place a lien on your home until they collect payment.
- Tax lien: Failure to pay federal, state or local taxes can result in a property lien against your home until the debt is repaid or settled.
A lien on your credit report will drastically affect your payment history, which accounts for 35 percent of your credit score. Do your best to resolve the issue quickly.
- A settled or closed account may offer finality, but its nature is another story. Creditors may ask the bureaus to list your account as negative if you settled a debt for less than the total balance or your account was closed due to reckless behavior. Although it’s difficult to quantify the effects of a negative account, it won’t help you on the journey to credit improvement.
- Partial Payment. When debt is overwhelming your income, it’s sometimes beneficial to contact your creditor to ask for a reduced payment plan. Although this strategy will help you find the right path, the result can add a “partial payment” notation to your credit report. This action is viewed in a light similar to charge offs, collection and bankruptcy accounts, often damaging your score by 100 points or more.
- Overdue accounts cause more than credit score damage. Failure to pay for a financed item, e.g., a car can lead to repossession, leaving you with no transportation and a seven year dark spot on your credit reports. These consequences are likely to make it difficult for you to find a similar loan in the future.
- Settlement Accepted. Negotiating debt reduction may save you money, but settling an account for less than the full balance is a sizable blunder. A Settlement Accepted notation will hurt your payment history, lower your credit score and increase your risk level when it comes to future loans.
- Account in Credit Counseling. When a debt is repaid with the help of a financial management company to help you negotiate a lower interest rate or payment period, an “Account in Credit Counseling” notation may appear on your credit report. The good news is, some cases may not result in credit damage, but there are no guarantees.
- Some debts cannot be discharged in bankruptcy. When you fail to pay accounts like student loans, child support or taxes, a judge can order wage garnishment to collect payment. A garnishment will lower your income but will not appear on your credit report. That said, you won’t escape without consequences. When you apply for a new loan like a mortgage, you are required to reveal all financial obligations, including a wage garnishment.
- Late Payment. A late payment is bad news for your credit, no matter how severe the delinquency may be. 35 percent of your credit score depends on a positive payment history, and forgetting or even ignoring past due amounts is likely to haunt you for up to seven years.
- An account you don’t recognize could indicate a few things:
- A change in incorporation, e.g., a company name change
- Mistaken identity
- Identity theft and fraud
Alert the credit bureaus of an unknown account immediately. A foreign influence could cause unnecessary stress on your credit reports.
- An inquiry is listed on your credit report when you allow a third party to view your information. Although one or two inquiries will not hurt your credit, multiple inquiries can portray you in a negative light. Avoid credit damage by practicing discretion. Apply for new accounts on an as-needed basis only.