1. Collections Accounts
Collections occur when you have a debt that you have not paid in a timely manner. When you fall substantially behind in delinquency on a bill like a credit card or medical bill, the original creditor will usually write off the debt as a total loss. They then sell it out to a collection agency. It is then entirely up to the collection agency to try to get the money that you owe back.
Not every lender or creditor has the same policy on this action. A great number of credit cards send out the 180 day delinquent accounts to collectors. At this point, either they or the collection agency will report your account as “in collections” to the major three credit bureaus. This will cause you to have a “collection” notation on your credit reports. The original creditor may or may not alert you to the fact that they are sending your account out to collections.
Once you suffer an in collection account on your credit report, you can anticipate your credit score plunging. The number of points such a collection account will impact your score depends on how high your credit score proves to be when it becomes reported as a collection account.
A correspondingly higher credit score will lose more points in general.
The amount of the account in collection will also determine how big an impact this status has on your credit score. If your original debt amount was under $100, the collection account may appear on your credit reports but not much harm your score (or even hurt it at all with Vantage Scoring’s model for under $250 collections accounts).
Some of the credit scoring models distinguish between the various kinds of debt, like non medical or medical, while others will discard penalties for collections accounts that you have paid off.
2. Foreclosures and Short Sales
Foreclosures and short sales have to do with mortgages on which you fall behind. The bank has the right to foreclose on your property if you become seriously delinquent. You could also arrange a short sale with the bank to repay part of the loan and settle it. Both of these impact your credit score in several meaningful ways.
Yet short sales done properly will create a less negative effect on your personal credit score than an all out foreclosure will.
Foreclosures can have a devastating impact on your credit score. For starters, it will stay on your credit report for a full 10 years, though the impact will be gradually less as it gets older.
The late payments that led to the foreclosure cause a significant negative effect on your credit score. According to FICO, foreclosures will cause an estimated drop of from 175 to 300 points in your score.
Short sales have a considerably smaller impact on your score. This is a more difficult procedure as it requires approval from the mortgage lender who is involved. You will have to give the lender an application detailed with information on your financials.
If you can arrange a short sale with your lender without missing any mortgage payments, it will reduce the negative impact on your credit score.
Also, you should negotiate so that your lender reports to the credit bureaus that your short sale was paid in full. It will make a considerable difference in the way it is interpreted from your credit report.
If you can not get a fast approval of such a short sale from your lender, you may be forced into missing payments on your mortgage. This would cause your score more harm as timely payment history amounts to 35 percent of your FICO credit scoring component. The lender could also determine that you do not meet their qualifications for a short sale, which would then leave you with either finding a way to hold onto the house or letting it fall into foreclosure eventually.
3. Bill Payment History of Late Payments
There is no larger single element that impacts your credit score than timely payments (amounting to 35 percent of your credit scoring model). This means that missing a payment and having it marked as late to the credit reporting bureaus will hurt, sometimes quite a lot.
A late payment that is reported as 30 days or more past due could crash your credit score by up to 100 points. If your credit is without blemish, it might cause this amount of a drop. When your score is already lower, it will not affect it as much, but it will still damage it.
4. Increased Debt to Credit Ratio
The total debt that you possess remains the second largest factor in determining your personal credit score. As a 30 percent component of your credit score, you can not afford to abuse this ratio. Credit scoring models look at this credit utilization (the ratio of your credit card balance to your total credit limit) on every one of your cards as well as your total credit utilization for all accounts.
The higher these balances are compared to your credit limits, the more damage this does to your personal score.
The worst possible thing you can show in this category is over limit or maxed out card balances (amounting to 100 percent or higher utilization).
Remember that credit scores also consider the proximity of your loan balances to original loan amounts. This is why paying down loan balances will help your credit score.
The opposite is true too. If you carry large amounts of debt (in particular credit card debt), this will harm your credit score and be damaging in your efforts to get new loans and credit card approvals (or to increase your credit limits).
Your debt to income ratio might be low, but if your credit utilization ratio is high, this will negatively impact your total score. It could subsequently cause you to be denied obtaining credit. The credit scoring models want to see no higher than 30 percent debt to credit ratio and prefer 10 percent in an ideal world.
Repossession occurs if you miss multiple loan payments that cause you to default on your car loan. The statutes in most states today permit your creditor to assume possession of the car (from a delinquent auto loan) whenever it is convenient for them. Repossession is an especially bad mark on a credit report as it remains for up to seven years and can cause you a 100 point credit score drop.
Repossessions harm your credit in three meaningful ways.
This starts with late payments. These cause negative effects on your credit report for up to seven years by themselves. Once your car has been repossessed, the three main credit bureaus will likely include notations that your car has been repossessed for up to seven long years.
Collections efforts to recover money you still owe on the loan after they repossess and sell your vehicle will also show on your report for as long as seven years. This is the case even if you pay off the debt later.
The best way to avoid going through the damage of repossession is to stay in contact with your lender once you fall behind on payments. You may be able to arrange an easier and longer repayment schedule if you have suffered from financial hardship or natural disaster.
6. Negative Narratives
According to Vantage Score, negative narratives are notations on your credit report that are derogatory. These cause the most harm and will keep your score from rising for longer time frames. Lenders consider such derogatory entries to be proof of debt that you mismanaged. It explains why the various credit scoring models count them as sufficient reason to allow significant and lasting reductions to your credit score.
You should avoid all of these 12 derogatory remarks if at all possible:
Foreclosure process started, foreclosure completed, Forfeiture of Deed in Lieu of Foreclosure, Redeemed Repossession, Repossession, Voluntary Repossession, Paid Charge Off, Account Charge Off, Account Included in Bankruptcy, Settlement Accepted on Account, Account Currently 30 (60, 90, or 180 days) past due, and Account assigned to external or internal collections agency.
7. Third-Party Collections
As one of your accounts reaches the seriously delinquent point, the creditor may cut their losses by selling off the account to a third party collection agency. This could happen after they have made numerous attempts through their own internal collections department. After they have sold off your account to the third party, this in collection account can get reported on your credit report as a separate delinquent account.
This is part of the way that they create substantial negative effects on your credit scores.
Third party collections only appear on accounts that are unsecured (like personal loans or credit cards). Mortgages, car loans, and other secured loans show up as foreclosures or repossessions on your report. Repossessed car loans can also be sent out for third party collection. If your car is repossessed then sold at a steep discount at auction, then the recovered amount could be lower than your remaining balance, which would then be sent out for collections.
There are only two ways to have collections taken off of your credit report.
If the information reported is valid, it takes a full seven years from the first delinquency date for the information to drop off of your three reports. This delinquency date is the point from which your account first went delinquent (and you never again made it current).
If the information on collections is not accurate, you can always file disputes with the credit reporting bureau. This would result in the record either being removed or updated if the credit bureau rules that the dispute in your favor.
8. The Age of Your Credit History
The age of your credit history could be a positive or a negative influencer of your credit. Lenders consider this length of time to ascertain the chances of your repaying your loan or credit in a timely fashion. With a longer history, this demonstrates to them that you possess more experience utilizing and managing credit successfully.
The theory goes that the longer amount of credit history you have, the more certain lenders are able to be in deciding the quantity of risk they are assuming in lending you money.
Opening or even closing an account can lower your credit score over the short term.
This is because it will reduce the average age of your credit accounts. If you close an existing credit account that has a longer credit history, this will likely cause a negative impact to your scores. This impact becomes more pronounced should you decide to close out a number of older accounts at a single time, per Vantage Score.
Opening new accounts waters down your length of credit history and can similarly cost you points, particularly if you open several new accounts in close proximity to one another.
9. Payday Loans
In general, Payday Loans do not negatively impact your credit score so long as you pay them back fully and in a timely manner. There could be an exception. Some lenders may regard Payday Loans as negative since they feel that customers of these loans are not as reliable a borrower as others. In such cases, having a Payday Loan on your personal credit history could harm your chances of getting approved for some loans.
It is important to keep in mind that you have more than a single credit score. The two major models of FICO and Vantage Score, as well as the three main credit reporting bureaus of Experian, Equifax, and TransUnion, all calculate scores differently using their own proprietary criteria.
The result is that Payday Loans can impact your various scores differently. Some lenders also do not distinguish between traditional loans and Payday Loans.
The personal information section of your credit report may list past or current employers. This is not promised to be a complete employment history or picture. Instead it is an employer list that was included in your past applications for credit that then reached the three main credit reporting bureaus (from your lenders).
This information is only obtained when you apply for a loan or credit, and not all lenders even report it. This explains why any employer list is not likely to be comprehensive. There are likely to be gaps shown in such an employment list (which depends on the last time you applied for credit).
The good news is that this will not create any impact on your credit history or score.
In fact, unemployment will never directly impact your credit scores. The reason is that your credit reports are not set up to prove if you are employed. Instead, they share information related to debt and credit. There could be an indirect effect of being unemployed revealed on your report if you can not make your timely monthly full debt payments because you are unemployed.