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Credit Rating
Credit
reports are to an extent a secret dossier of a person that may have
a significant impact upon their life. Almost everything that we do
financially is reported, collected, and stored in each persons
credit profile. What we do in our lives can directly affect how
favorable or unfavorable the reported information appears. Often
times we do things, unbeknownst to us, that have a negative impact
upon our credit status. The following is a list and explanation of
many adverse actions that will ultimately affect how others view
your credit history.
1) Debt.
Debt is a word the financial industry uses to describe any situation
that you borrow money. "Too much debt" is how the industry describes
situations where people borrow more money than they can easily
repay. There are a lot of types of debt: credit card debt,
department store debt, charge accounts, auto loans, student loans,
mortgages, and money that you may owe the Internal Revenue Service.
You might also borrow from parents, relatives, and friends, although
those debts may not be reflected in your credit report.
Your ability
to borrow more money or to have your credit extended is directly
reflected by how much debt you carry. Mortgage lenders, for example,
determine your purchasing ability by applying a debt-to-income ratio
(a ratio that is calculated by totalling your monthly debt payments
plus the proposed monthly debt payment divided by your gross monthly
income). Too high of a debt-to-income ratio reflects greater risk
with the loan and may result in rejection of the credit application.
Most mortgage lenders will allow you to pay up to 42 percent of your
gross monthly income in debt service. Of course this may vary
depending upon the loan size, the type of loan, and the type of
property you are purchasing.
2) Late
payments. If you're chronically late in paying your bills,
you've got a late payment problem. It can be a severe blemish on
your credit report for lenders prefer to lend money to people who
repay debt in a timely manner.
How late is
late? If you don't pay your Visa bill by the due date, you're late
and it may show up on your credit report. If you fail to make a
payment all together, a past due notice will be sent to you and you
may be assessed a finance charge. If you're so late that you stop
paying entirely on the account, it is likely that the matter will be
turned over to a collection agency, that will be reported on your
credit history as well as a late payment notice.
How long
does a late payment stay in your credit history? Typically, a late
payment will appear for two years, though credit bureaus may keep
them on your credit report for up to seven years. However if you
missed only one payment in the last two years and you have been
current on the account for the past 18 months and you have a
reasonable explanation for the late payment, it is unlikely that a
lender will deny you of credit solely on the basis of the late
payment. How you are coping with current credit issues is far
more important.
3)
Bankruptcy. Sometimes the financial burdens of life become so
overwhelming that a person is left with only one choice-to file for
bankruptcy. A tragedy may have occurred in one's life, such as the
loss of a spouse or a job, or a person may have foolishly over
extended their credit and is no longer able to keep up with their
debt. The reasons are many and the consequences are severe. Once
you've been declared bankrupt, a judge discharges your debts and, to
a great degree, wipes your financial slate clean. Sounds easy and
simple but it is not. Bankruptcy can be expensive and time-consuming
and forever you will feel the stigma of it. Most negative
information on your credit report is kept for up to seven years; a
bankruptcy can stain your credit report for as long as 10 years.
Bankruptcy
is a significant credit hurdle, but it can be overcome. The key to
overcoming a bankruptcy is to re-establish credit and show that you
are no longer a credit risk. Most people are left only with the
option of secured credit cards where they must closely monitor their
spending habits so not to over extend themselves again or must
suffer from higher interest rates on loans so that they can put
themselves on the road to a good credit profile.
4) Errors.
Because of the volume of information that is being cataloged and
entered daily into the credit databases, errors have been known to
have happen. . Many people have been turned down for credit because
a $5,000 collection account appears on their report for a credit
card that they never had. This is most commonly seen when two people
share the same name (like a father and son) or have similar social
security numbers. However, one good reason for checking up on your
credit report is that someone else may be using your social security
number or credit card numbers and playing havoc with your personal
credit history.
5)
Repossessions. If you buy a car, furniture or appliances on an
installment plan (where you pay a little bit of interest and
principal each month), and you fail to make a payment or two, the
company that sold you the item may require you to give back the
merchandise until it is paid for. If you refuse to give it back, the
company may come by and take it (repossess it). Repossessions are
usually noted in your credit report.
6)
Accounts turned over to a collection agency. If you don't pay a
bill, you will probably receive a threatening letter from a
collection agency hired by the creditor to collect the overdue
amount. This is considered a collection account. If you receive such
a letter, it should tip you off to a potential problem with your
credit history. Not only will the creditor report to the bureaus
that your account is delinquent, but collection agencies usually
report to the bureaus of the collection account as well as their
efforts to collect on past due bills. It is important to remember
that if you pay off a debt from a collection agency that you make
sure you have them send you a letter stating that the debt has been
completely satisfied and no further action on their part or the
creditor is necessary.
7) Too
many credit inquiries. It is common place, for example, to have
several car dealerships to pull your credit information whenever you
are out shopping for a new car. Whenever you apply for a new charge
card, a loan or to have someone extend you some form of credit, an
inquiry is reported on your credit report. Seems harmless but
lenders become worried if you appear to be on a credit-gathering
spree for it could mean that you are out to expand your credit
quickly for a specific purchase or that there are new credit
obligations on your report that are not showing up. Too many credit
inquiries can spell trouble which would make you a bigger risk than
what they would be willing to undertake. Credit inquiries stay on
your credit report for two years (but most lenders are particularly
interested in the inquiry activity within the last six months).
8) Too
much available credit. One of the easiest credit issues to fix
is having too much available credit. Even if you have never carried
a balance on any credit card and if you have a lot of cards,
creditors simply add up the balance as potential debt you could take
on at any moment.
9)
Absence of credit. Again, this is another credit issue that you
can easily overcome. Many young people, for example, often fall prey
to not having a sufficient credit history built up and as a result
are turned down for credit. Many lenders do not want to take the
risk of extending debt when they don't know how well someone can pay
back their obligation.
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