What Negatively Affects Your Credit Rating
What negatively affects your credit rating? More than you think. Consumer debt is bought and sold every day.
While most people only assume that things such as not paying a credit card bill or making a mortgage payment on time, to be the sole reasons for low credit ratings, they are not.
Upon checking my personal credit report a few years back, I noticed that there was a debt collector reporting to the three bureaus that I had an outstanding debt for $25.99.
The debt was for a library book, yes, the library. The debt affected my credit rating, although I laughed about it with the collector I no longer sweep the small things up under the rug for later.
Sure, that sum is small in comparison to many peoples debt today. However, the question is what negatively affects your credit rating, and as you’ve read, simply failing to return a book can have a negative affect on your credit.
So What Negatively Affects Your Credit Rating
Spotty Payment History
You can have as many credit cards and loans as you want as long as you can make your payments on time.
Many people get into trouble with debt because they fail to separate their line of credit from their take home pay.
Every minimum payment that you have to make, takes away from your take home pay.
Your payment history makes up 35% of your credit score and it basically says that you have kept your word and have repaid or are paying all of your debts on time.
A hand shake and a verbal promise to repay does not cut it in every circle. Potential lenders and credit card companies all review this information on your credit report.
No matter your excuse, a bad repayment history will hurt all attempts by you to receive anything further that is credit related.
True, life does happen but can you also admit that sometimes you are not prepared?
The lender is the entity that is most at risk and late payment reports noted on your credit report allows future lenders or credit card companies to see that you are unreliable concerning debt repayment.
If you have a few credit cards with high balances or have cards that you consistently max out the balances, you are hurting your credit score.
This is called your debt to available credit. If you have high balances then your minimum payments are higher.
You have less take home pay because you now have to pay higher minimum payments. If you do not have extra money to repay new credit than your chances of receiving any are slim.
They additionally can see what your monthly payments are for each account that is owed money.
If you only pay the minimum amount that you owe on maxed out credit accounts you are most likely only paying a small amount of the debt because the larger portion of it is going to pay the interest on the debt.
A lender or creditor will view that situation and immediately know that if you continue to make minimum payments, the debt will continue to grow.
You owe $2800.00
You may have a low interest rate but we’ll use 25% because it is what many people’s rates jump to after they have missed a payment.
At 25% interest, $18.75 of that $75.00 payment does not count toward the $2800.00 that you owe. The actual amount that will be applied to the debt is only $56.25.
In order to lower your balance you should consider paying the interest as well.
Therefore, if you have 5 trade lines that are near their max and even though you have been making the minimum payments, your financial situation is often viewed as being tied up.
Your debt to available credit is what negatively affects your credit rating among a few more things I will share with you.
Some recommend not exceeding 35% of your credit line but in reality, you should not charge anything that you can not pay off in 5 or less payments. Treat credit accounts as layaway purchases if you want to avoid paying years of interest fees.
Your 1st Line of Credit
Next on the list of what negatively affects your credit rating is a little known fact to the everyday person.
Many of us have 3 or more credit accounts and unless you got lucky, the oldest or first account has a high interest rate.
With credit or financing offers coming in the postal mail and through email everyday, naturally many of us want to upgrade to new accounts with lower rates.
Why not, because the first credit account made it possible for you to get the other 2 accounts. It also makes it possible for you to even continue to receive low interest offers.
If you close the old account, the 8 years of great credit history goes along with it. Since the remaining 2 accounts are only 3 years old, your credit history is now 3 years instead of 8.
If 2 of your accounts are the same age and you close one of them, your score may drop but it should not drop as much as it would if you were to close your single oldest credit account.
If the card has a high interest rate then only charge small things on it here and there, then pay the balance before your statement is generated.
My first line of credit was actually a student loan. Paying it on time is how I received my first credit card offer.
I’ve since paid down the student loan but have purposely chosen not to pay off the small balance because the loan is my oldest line of credit. Every time that I make my payment on time, the lender reports it to all 3 credit bureaus.
Loans vs Credit Cards
There are many lenders that will not approve loans because people have too many revolving credit accounts. These type of accounts are another example of what negatively affects your credit rating.
Credit cards, department store cards, furniture lines of credit and home equity loans can fall into this category as well.
Revolving credit does not carry any collateral. If you stopped paying a credit account, you would get tons of debt collection calls and your credit score would drop.
You could possibly be taken to court but depending on the amount owed, it may not happen for years down the road.
Fixed loans that appear on your credit report and have great payment histories will put you in a better position when it comes to the loan approval process versus having 20 credit cards.
If you have recently taken out a home equity line of credit, write a letter to the credit agencies and inform them that the home equity line of credit is a mortgage account and not a revolving account like a credit card.
If the credit account is being properly reported, do nothing however, in most instances the line of credit will be reporting as another revolving account that appears to be maxed out to other potential lenders or creditors.
Hard 2 Year Inquiry
If you are the type of person that applies for every credit offer that is extended to you or keep trying to receive new credit to transfer old credit card balances too, you are damaging your credit big time.
Each time that your credit report is accessed by these companies it is considered a hard inquiry. All credit inquiries remain on your report for 2 years and are visible to anyone that has your permission to check your credit report.
Mortgage and car loan credit inquiries fall into a different category. The bureaus understand that you are shopping for the best rates, so the inquiries are not treated as hard inquiries.
Even so, all denials of credit appear within the same category on your credit report.
The True Way to a Better Life
I am sure that by now, although you do not see your credit rating everyday compared to the car out in your driveway or the shoes that are on your feet, you have come to realize just how important your credit rating really is.
If your credit history and score are in need of attention, make the sacrifices that you can to help repair the situation.
Many debt collectors that are ruining your credit by reporting negatively will stop sending negative reports to the bureaus if you agree to a small repayment agreement.
Truly, unless you do hit the lotto or are willing to save every bit of your money, dreams of success require credit.
Most employers today, require the right to check your credit before you are offered employment.
It’s time to start taking those 3 little numbers more seriously, start repairing your credit rating today and secure your future.