It’s no secret an excellent credit score comes with many financial perks. It can help you qualify for the loans you need and pay less interest on the funds you borrow. Good credit also makes renting an apartment easier and can even earn you discounts on your car insurance.
While building and maintaining a great credit score should always be a priority, mistakes happen. Some mishaps are more severe than others and can impact your credit rating for much longer. Understanding which items carry more weight on your score will help you avoid them in the future.
The Impact of Negative Credit Marks
Not all negative marks have the same consequences. Some may have only a minor and temporary effect. Here are four common items that can negatively impact your credit score.
Your payment history has the most significant impact on your credit – making up 35% of your score. As a result, you should always work to pay your bills and make your loan payments on time.
How Long: Late or missed payments can remain on your credit report for up to 7 years.
What You Can Do: Avoid missing payments by setting reminders for bills and loan payments on your phone. If you feel you will be unable to make a payment on time, reach out to the company or lender BEFORE the due date. They may have solutions available that won’t impact your credit score, such as a partial payment.
A credit inquiry is when a company checks your credit report and/or score. There are two types of inquiries – soft and hard.
- Soft inquiries are when a company pulls your credit – possibly without your knowledge. These types of inquiries are commonly used by financial institutions when sending you pre-approved offers. Other examples include background checks for employment or when you apply to rent an apartment. Soft inquiries do not affect your credit score and should not show up on your report.
- Hard inquiries are when you apply for a loan and give a lender authorization to pull your credit. Hard inquiries do impact your credit score and will show up on your credit report.
How Long: Each hard inquiry can remain on your credit report for up to 2 years.
What You Can Do: An inquiry is a negative mark that does not carry significant weight. If you are applying for a loan, such as a car loan, the impact will be minimal and temporary. However, inquiries can become more significant if you frequently apply for loans or credit cards.
Also, if you apply for several loans or credit cards in a short period of time, lenders may believe you are in financial trouble. It’s best to only apply for credit when necessary.
- Collections, Charge-Offs, Repossessions, Foreclosures
If you fail to repay your loans on time, your account may move into the collections phase. The lender will try to work out a payment plan with you or take other measures to collect on the debt when this occurs. If the loan has collateral, such as a car or house, they will often repossess the vehicle or foreclose on the home. If the loan doesn’t have collateral, such as a personal loan, they may charge off the loan and use the courts to recoup their losses.
How Long: Collection items can remain on your credit report for up to 7 years.
What You Can Do: If you’re facing financial difficulties, it’s always best to reach out to your lender as soon as possible. The earlier you make your situation known, the more solutions they will have to help you. Fixes may include partial payments or restructuring your loan temporarily to allow you more flexibility in getting back on track.
When all other financial options are exhausted, you may choose to file bankruptcy. This is the legal process of eliminating all or part of your current debts. Typically, you will be required to repay a portion of your debt utilizing a payment plan.
How Long: Whether you file Chapter 7 or 13, a bankruptcy can remain on your credit report for up to 10 years.
What You Can Do: Filing for bankruptcy is one of the most harmful items you can have on your credit report. While it may seem like your only option if your debts are significant, other solutions may be available. Before deciding to file bankruptcy, always seek the guidance of a financial advisor and attorney first.
If you do file for bankruptcy, immediately start repairing your credit score afterward. Your credit score won’t improve right away, but actively working to rebuild your credit will help in the long run. For example, you may need a car loan in a few years. While you may not qualify for the lowest rates, if a lender can tell you’ve been working to rebuild your credit and manage your money responsibly, they will be more likely to work with you.
Consider a secured credit card from the credit union to rebuild your credit after a bankruptcy. Both are great options to begin the healing process to your credit.
The benefits of an excellent credit score are many; however, getting to that level may sometimes feel overwhelming and confusing. It’s important to remember that even if you make mistakes along the way, that’s ok. Learn from the hiccup and keep moving forward.
The best thing you can do is ask for help early. If you feel you may not be able to make a payment on time, let the company or lender know. Any solution that won’t impact your credit score is a plus.
Finally, remember that all negative marks eventually come off your credit report with time.
We’re Here to Help!
Whether you’re just starting to build your credit history or you’re trying to rebuild your score, we’re ready to help. As your credit union, we’re here to answer all your questions and provide one-on-one financial guidance to help you reach your goals.