A number of surveys and studies in recent years have shown that errors on consumers' credit reports are not out of the ordinary, though statistics vary on just how common they may be. In general, borrowers should keep in mind that while there is a chance a low credit score can be attributed to such an entry, more credit repair is likely needed to get their standings back in order.
There are many reasons that borrowers may have lower credit standings in general, and one of them is certainly that a creditor or collections agency made a mistake in reporting an account that belonged to someone else. But more often, it is a borrower's own missteps in dealing with the accounts in his or her name that can lead what used to be a good credit score to tumble considerably. Errors such as missing payments, carrying too much debt, canceling long-held accounts or applying for credit too often can all take a negative toll on standings in general.
What are the most common issues borrowers face?
The problem that will affect consumers the most these days, and which has been persistent for a long period of time, is that making even one late payment into an account can undo months or potentially even years of hard work to build up a responsible borrowing history. This is because the ability of a borrower to make all his or her payments on time and in full every month makes up 35 percent of one's credit score, the single largest portion based on any one factor.
When a late payment occurs, whether the borrower misses a single day or an entire month, it can result in a score tumbling appreciably, and the only way to make up for such a mistake is for the borrower to once again become more conscientious about getting every bill paid before their deadlines. Once this has been done for a period of several months or even a year, the effects of the one missed payment will likely have been wiped out where a score is concerned, though it will linger on a credit report for far longer.
Another major factor that goes into determining a credit score, and which is very common among consumers these days, is that often, outstanding balances are far higher than they should be. While credit cards come with limits up to which consumers can be free to borrow, taking on too much debt will lead to a far lower credit score. The amount of money consumers owe on such accounts versus the total allowable limits on those cards – measured as a percentage – is known as "credit utilization ratio" and makes up another 30 percent of a score, and contrary to popular belief, the higher the balance, the worse this portion of the rating will be.
In general, the best way to max out this factor of a score is for borrowers to keep their outstanding obligations around 30 percent of their total limits or less. For instance, borrowers who have several credit cards with a combined limit of $10,000 should aim to carry no more than $3,000 if they want to make sure this part of their score is spotless. Any more than that, and it will start to decline. Thus, those who are above that 30 percent level may want to make more conscientious efforts to slash that debt, such as by cutting out purchases on their credit cards whenever possible and making larger monthly payments, preferably starting with the accounts that carry higher interest rates. By doing so, they will cut more deeply into their loan principal and reduce debt in a far quicker fashion than if they only made payments of at or near the listed minimums.
However, when doing this, consumers may also make the mistake of closing any accounts they've reduced to a zero balance, and doing so is problematic for two reasons. First, doing so will necessarily reduce the total combined value of consumers' credit limits, meaning their utilization ratio will be negatively impacted. But in addition, they will also reduce the average age of all the accounts in their names, particularly if the canceled card was one they held for a long time. That factor makes up another 15 percent of a score.
Finally, people who apply for credit too often in a relatively short period of time – usually a few months – in an effort to obtain new accounts will also see their scores fall. This factor makes up 10 percent of a rating, and lenders see repeated applications after rejections as evidence that a person is having cash flow problems.
Of course, these concerns don't mean consumers shouldn't check their credit reports regularly for those problematic unfair markings. If any are discovered, working with a credit repair law firm may help to correct the issues relatively quickly.