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By Brenda

Reasons You May Have a Bad Credit Rating

Jun 30 2017 Parent Category I

Your credit score is a critical factor in your financial life. It follows you everywhere you go and can make the difference between getting a loan and being denied. Your credit rating also plays a huge part in determining your interest rate. Knowing the factors that contribute to a good credit score are important. It’s just as important to the factors that can lead to a bad credit score as well.


Late Payments/Nonpayment

Your credit score is divided into categories. Your payment history accounts for 35% of your total score. Credit card payments that are more than 30 days overdue are added to your credit report and will stay there for 7 years. Missing mortgage payments not only hurts your credit score but can also lead to foreclosure. It will also be harder to get approved for financing in the future.

Completely ignoring payments on your bills is worse than missing payments. A continually ignored payment is updated every 30 days on your credit report. It is charged off after 180 days. Defaulting on loan payments has similar consequences.


High Credit Utilization

High balances on your credit cards results in high credit utilization which can seriously hurt your score. You might think that getting rid of some of your credit cards to limit your usage is a smart idea but the opposite is true. Closing cards that still have balances on them makes it look like you have maxed the card out. In addition, closing cards that have no balance lowers your available credit. The length of your credit history accounts for 15% of your score and longer is better. Closing old cards that you no longer use makes your credit history appear shorter. All of these factors can be extremely detrimental to your score.


Applying for Too Many Credit Cards/Loans

Applying for a new credit card or loan involves a hard inquiry into your credit score. Potential creditors or lenders need to assess how much of a risk you are. Inquiries account for 10% of your score and too many inquiries in a short period of time can cause a  sharp drop in your credit score.


Accounts in Collections

Some creditors may decide to send your account to collections if you neglect to pay. This is especially common with medical debt. Collection agencies are third-party debt collectors who will try to collect what you owe and are notorious for frequent phone calls.

It is a common thought that it is best to pay off the debt in collections as soon as possible and in many cases this is true. You shouldn’t let other regular payments run late just to make a payment in collections. At this point, your credit score is already impacted. Missing other payments for the sake of paying off the debt in collections will only harm your credit score further. Your best bet is to keep all of your active accounts current.


Accounts Charged Off

Ignoring a payment for six months can lead to a charge off. This happens when your creditor or lender believes that you will not make any payment at all. It is also one of the worst things that can happen to your credit score. A charge off means you can no longer use the account, but you still owe the balance left behind. The initial impact to your credit score can be severe. Your score can improve bit by bit as time goes on as long as you have no other negative entries. Charge offs stay on your report for a total of 7 years.

Knowing what can lead to a bad credit score can help you to greatly improve your financial life. There are plenty of tools online to help you monitor your credit score. Monitoring can help you to spot any errors that can lower your score. Taking action right away will help your score to get back to normal (or even improve) faster.


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