Credit scoring continues to be a confusing, and often misunderstood topic. There are many factors that can have a significant impact to your FICO score, but there are 7 major default factors that will undoubtedly lower your score. Understanding these 7 deadly sins and how they impact your score will help prepare you to make the best decisions, and help you navigate your way back towards a higher credit score.
Frequent and Serious Late Payments – This is the most common offense. 30 days, 60 days, 90 days late and more, significantly impact your credit score. Recent updates to the FICO scoring formula, has placed greater emphasis on frequent late payments. Now even a 30 day late payment on multiple accounts can impact your score as severely as a 60 or 90 day late. While late payments can remain on credit reports for 7 years, the more recent occurrences have the greater impact. The good news is as that late payment ages, and you start to make your payments on-time, your score will steadily increase.
Charge offs – This occurs when a lender feels as though there is no hope of reclaiming any payments and while it can happen if you’re 30 days late, most credit card lenders often wait until you are seriously delinquent, greater than 90 days before charging the debt off and selling to a collection agency. A charge-off will stay on your file for seven years from the date the account is terminally — 180 days — past due. Your best action is to keep in touch with your creditors if you’re having problems to let them know you’re attempting to stay on top of this debt. Often, they’ll work with you.
Collections – This happens when a lender has decided to charge-off a past due account and enlists the help of a 3rd party collection agency. When this happens then the collection agency will likely report the collection account to the credit bureaus, negatively affecting your credit scores. These can remain on credit reports for 7 years, regardless if it has been paid or not. Collections can be triggered by unpaid medical bills, utilities, credit card debt, etc, and they’re all equal in terms of the impact on your score. The good news is that now collections with an original balance of less than 100.00 will have a significantly LESS impact on your credit score.
Settlements – Many times unpaid debts can be “settled” for less than the entire amount due. Credit cards, other debts, and even short sale mortgages can be settled. These can remain on credit reports for 7 years. When deciding on settling for less than the full amount due, make sure your agreement with the lender is that they will report the balance as PAID IN FULL. Reporting a settlement as a “deficiency balance” will have a greater negative impact on your credit score. There are many companies that offer to settle your debt for less for a fee, however you can do this on your own, and save yourself the extra fees these companies charge.
Repossessions – Typically repossessions are thought of in relation to cars, but any asset that secures a loan can be repossessed. These can remain on credit reports for 7 years, and you still may owe additional money. When an item is repossessed and sold at auction, if the money obtained at the auction does not cover the balance, you are still responsible for the remaining balance. This will again be reported as a deficiency balance and will negatively impact your credit score.
Foreclosures – These occur when you are no longer able to afford your mortgage payments and the lender requires you to vacate the premises. The lender will then sell the property to reclaim the balance remaining on the mortgage. If the proceeds recovered from the sale do not fully cover the remaining balanced owed, you can be sued for the remaining balance. These laws vary from state to state so it is best to seek the advice of legal counsel before a foreclosure starts. These can remain on credit reports for 7 years.
Public Records – Bankruptcy, Tax Liens, and Judgments – There is no “good” public record as it pertains to credit reporting. They’re all bad, and they all have the most damaging effect on your credit score. Bankruptcies can remain on your credit reports for 10 years. Judgments can remain for 7 and unpaid tax liens, indefinitely.
- Bankruptcy–There are 2 types of consumer bankruptcy filings, Chapter 7 and Chapter 13 — and both can stay on your record for up to 10 years. After your bankruptcy has been discharged, it is VERY IMPORTANT that you check your credit report, to make sure all debts that were included in the filing are listed as such. If accounts that should be discharged are noted as a charge-off or late payment, your score will be double-dinged — once for the bankruptcy, once for the delinquency. Make sure everything is reporting accurately and dispute any inaccurate information to get your credit report reflecting accurate information, so you can get on the road to a better credit score sooner.
- Judgment–A judgment occurs when you’re sued for a remaining balance on a debt and you lose in court. Pay up as soon as possible. It won’t help your score, as the damage is already done, but an outstanding judgment can become a wage garnishment, and cause additional financial hardships down the road.
- Tax Lien–Finally, a tax lien is filed by the federal government when you owe taxes. Liens are different in that they can stay on your report indefinitely, until you pay in full. When you have paid them in full, they can be removed from your credit report. You must notify each bureau and provide them the proper documentation to show you have fulfilled this tax obligation. Paying a tax lien in full and having it removed from your credit report will have a significant increase in your credit score.