Like finding a stain in an otherwise pristine piece of linen, seeing a derogatory mark on your credit report can be frustrating. Depending on the entry, you may be able to work around it. Or you may not not. Sometimes, there’s no way to fix a bad entry on your report, no matter how much you wish it were false.
As a general rule of thumb, most derogatory entries last for seven years. But as you’ll find out today, there are some exceptions. Take a look at the list below to find out how certain entries may negatively affect your credit report.
1. Hard inquiries
If you’ve applied for a credit card or line of credit in the past, you may already have a hard inquiry on your report. A hard inquiry (or a hard credit check, as it’s also known) helps some financial institutions assess your creditworthiness.
A hard inquiry does show up on your credit report when a financial institution does a hard credit check. This means that your report will show a hard inquiry, even if you don’t get the loan.
In some instances, you may be told that only a soft credit check will be performed and that it won’t show up on your credit report. These checks are typically done by various institutions as a type of background check. However, it’s important to note that there are instances where no distinction between a hard or soft check is made, and all inquiries show up on your report. For example, this is the case with a Clarity subprime credit report.
How do hard credit checks affect your credit score?
A hard inquiry typically may between 5 to 10 points from your score according to FICO.
This may not mean much if you’re part of the super-prime club, or the 1.4 percent of Americans who had flawless scores of 850 in 2017. Sure, ten points off from 850 would rob you of bragging rights. But as a consolation, 840 would still translate into an exceptional credit rating. You’ll likely still receive all the same perks as you did with a perfect score.
But if your score hovers at 580 on a FICO scoring model, a hard inquiry may dock your credit from fair to very poor. This drop from one rating to the next may have a direct impact on the kinds of credit you have available, as well as the rates and terms lenders offer you.
Even though you’re losing the same number of points in both scenarios, the points may mean more when you have a lower score or if you’re towing the line between two credit ratings.
How long do hard inquiries affect credit score?
A hard inquiry may stay on your report for two years. During those two years, other financial institutions will be able to see previous hard inquiries in your file. However, it may not impact your credit score for the entire time it’s on your report.
Generally, a hard credit check influences your score during the first year that it appears on your report. However, it may have a longer or shorter impact depending on what’s already in your file.
To suggest all credit checks affect every credit report the same way is one of the myths about borrowing money online that we address in our blog. Sometimes multiple hard inquiries performed as a part of rate shopping will only count as one, depending on how close in time the checks were performed and if they’re for the same type of product, such as a mortgage.
2. Late Payments
Paying your bills on time every due date is one of the best ways you may add good entries onto your credit report. This is because your payment history determines the largest portion of your score. This is dependant on a few factors, including whether the company you’re paying reports payments to a credit bureau.
But anyone who’s lost track of the date knows it’s not always easy to do. It’s even harder when money is tight and circumstances make it difficult to scrounge up the money you need in time.
If you struggle to make on-time payments, an Aite Group study shows you aren’t alone. The study estimates that nearly half of Americans pay their bills late, while 5 percent of them never pay on time.
What qualifies as a late payment?
Having to make a late payment may be a scary thing to some people. While the extra charges may be minimal in some cases, these late payments can sometimes hurt your credit score. However, there are certain nuances to this process that are important to understand. One of those things is time frame in which a late payment is reported to a credit bureau.
Let’s say you’re in the process of paying a bill online and the clock goes from 11:59pm on the day it’s due to 00:00 of the next day before the server accepts it. Will your credit score be penalized because of your slow Internet connection?
In most cases, no. Financial institutions, utility providers, and other companies may only report late payments as delinquencies once they’re 30 days or more past due. This means minor, accidental delays may not have an impact on your score.
How do late payments affect your credit score?
Your score will likely take a hit once you surpass 30 days, however, and the damage may worsen for every additional 30 days you’re late.
Things take a significant turn once you’re 90 days late, because you could be seen as “repeat offender” which mean you may seem like a bigger risk to creditors.
How long do late payments affect your credit score?
A late payment stays on your report for seven years. This mark will remain there even if you catch up on your payments, never pay late again, or close the account.
This rule applies whether a payment is 30, 60, or 90 days overdue. But after 180 days late, a delinquent payment may escalate into one or more of the next five negative credit entries.
A charge-off is what a late payment may turn into if you fail to pay your bill for 180 days or more. If a bill goes unpaid for this long, the lender may declare your debt as a loss for the company, reports the negative entry on your credit report, and/or continues to try to collect the money you owe.
A charge-off is simply an accounting term used on the operational side of a lender’s business. It doesn’t change the fact that you still owe money.
This revelation may come as bad news to a growing number of people. According to Bloomberg Intelligence, the rate of charge-offs for credit cards has climbed to 3.82 percent in the first quarter of 2019. The rate of charge-offs hasn’t been this high in seven years.
How does a charge-off affect your credit score?
A charge-off may dock as many as 150 points from your score. Generally, a charge-off has a greater impact on higher credit scores than it does on lower ones.
How long do charge-offs affect your credit score?
A charge-off will last on your credit report for seven years from the date that it was charged-off. As with late payments, paying off what you owe won’t undo the impact to your credit score. This derogatory mark will stay on your report, separate from the initial delinquent entry.
If a lender that charges-off an account believes it’s unlikely to recover the money they’re owed, they may cut losses by transferring or selling the debt to a collection agency.
If your account goes to a collection agency, you’ll no longer owe the original lender that you opened the account with but the collection agency that takes over the debt.
According to 2018 data from the US Census Bureau, it was estimated that 31.6 percent of credit file holders — or 71 million Americans — have debt in collections.
Generally, collections apply to unsecured debt like installment loans, personal lines of credit, and credit cards. Unsecured financing options aren’t backed by collateral. For a more detailed definition of an unsecured loan and other financial terms, click here.
How does collection affect your credit score?
Once a collection agency assumes your debt, you’ll see a collection notice on your credit report. This notice will be a separate entry from the charge-off that it came from.
In other words, once your debt is in collections, your report will show both a charge-off and a collection notice.
This means a collection notice will affect your score on top of any of the damaged caused by a charge-off. Once again, how far your score drops depends on how high your score is to begin with.
How long does a collection affect your credit?
An unpaid collection entry usually lasts seven years, plus 180 days from the date the account first became late.
However, recent changes to the most popular credit scoring models may produce an alternative timeline. The latest FICO and VantageScore algorithms remove collections from your record as soon as you pay them in full.
How long your collection lasts will depend on the scoring model your lender or collection agency uses. Unfortunately, many financial institutions still use older versions of FICO and VantageScore, so you may have to wait the full seven years before you see the collection come off your report.
A repossession is another potential outcome for delinquent payments. It may happen if you’re unable to repay a secured loan.
A secured loan is backed by collateral that your lender may collect if you default on your loan. They have the right to take this collateral — or in other words, repossess it — and sell it to recover the cost of the loan depending on your delinquency and the terms of your agreement with this lender.
Collateral may be a valuable asset that you own, which can include homes, jewelry, future wages, and vehicles. In fact, vehicles aren’t just collateral — they’re often the reasons why people get loans in the first place.
Failing to pay your auto loans for months puts you at risk of losing that vehicle. Unfortunately, a lot of people were headed down that road at the end of 2018, when 7 million Americans had auto loans that were 90 or more days delinquent.
How do repossessions affect your credit?
Your credit score may suffer a significant drop if your report shows an account is in repossession. It may fall by 100 points. Like the previous negative entries covered so far, the exact number of points you lose depends on your credit score.
How long does a repossession affect your credit?
There may not be a hard and fast rule for how many points you can expect to lose. However, there is a general rule for how long a repossession entry lasts on your report. A repossession will stay on your credit report for seven years, starting from the date the account first became delinquent.
A repossession may or may not signal an end to the debt it means to reclaim. It depends on how much the collateral is worth, compared to how much you owe. For example, if a lender repossesses your car and sells it at auction for less than what you owe, you’ll still have to pay back the difference.
Another possible result of a chronically delinquent account is foreclosure. A foreclosure only applies to outstanding mortgages, and it works similarly to a repossession — only that the collateral your mortgage lender recoups is your home or business property.
Foreclosures happen more often than you might think. It is estimated that in 2018, 1 in every 215 homes were foreclosed upon.
How does a foreclosure affect your credit?
The previous entries have established a trend, and the foreclosure won’t buck it. Like most of the bad entries in this list, a foreclosure’s effects depend on your credit score. Folks with higher scores tend to have farther to fall than those who already have bad credit.
According to The Truth About Mortgage, a borrower who starts with a credit score of 780 may fall to somewhere between 620–640 following a foreclosure, dropping 140 points or more. But someone who starts with a credit score of 680 may only drop at most by 105 points to fall somewhere between 575–595.
How long is a foreclosure on your credit report?
A foreclosure may last on your report for seven years, starting from the first late payment. A foreclosure is a significant mark against your credit, so you may find it substantially limits the types of financial products you’re able to qualify for during those seven years that it’s on your credit report. It may also affect how long it will take to build your credit history up.
Last but not least on our virtual tour of bad credit entries is the bankruptcy. It’s the worst possible derogatory mark you can have on your report. As it significantly hampers your chances of getting credit in the future, you’ll want to do everything in your power to avoid it.
A bankruptcy is your last resort when you have so much debt you can’t pay any of your bills, and you don’t see your circumstances changing anytime soon. It involves petitioning the courts to liquidate or restructure your debt.
The outcome depends on what type of bankruptcy you file. Although there are several options, the two most common are Chapter 7 and Chapter 13 bankruptcy.
Chapter 7: If you successfully file for Chapter 7 bankruptcy, you’ll strike most debt from your record. This may include selling some or all of your assets.
Chapter 13: This option is for people with reliable income. It involves reorganizing your debt and setting up a modified repayment plan that may last as many as five years.
In 2018, bankruptcy filings were at a 10-year low. This is according to Supreme Court Chief Justice John Roberts, who reported just 770,000 cases were filed in September of that year.
How does a bankruptcy affect your credit?
It may come as no surprise to learn that a bankruptcy’s effects depend on your starting credit score. Someone with very good credit (around a 780 score or higher) could see as many as 240 points drop from their score, while someone with good credit (around a 680 score) could lose around 150 points.
No matter how many points you end up losing, you may end up with a very poor credit score as a result.
How long is a bankruptcy on your credit report?
A bankruptcy may last on your report anywhere between seven and ten years. It depends on the type of bankruptcy you file.
Generally, if you file for Chapter 13, it will stay on your credit report for seven years. However, Chapter 7 bankruptcy typically lasts for ten.
Bad Credit Will Eventually Fall off
Bad credit may feel like a monkey on your back. But you’re in luck. All but one of these bad credit entries have just a seven-year stint in your file. After that, these entries will drop off your report and your score will likely change.
If they don’t, don’t panic. The credit reporting process isn’t always perfect, so sometimes bad credit won’t automatically fall off your report. You can file a dispute and get this corrected.
In the meantime, it’s important you lay down good examples of credit. Working on filling your report with positive payment history and other good credit habits may improve the chances that your credit score is positively impacted once the weight of a bad credit entry is lifted.
Posted in: Credit Score