Bad credit occurs when a person fails to make timely payments for bills and loan payments, so it is highly likely that their loan application can get rejected. In fact, they might not get approval for credit cards, or even get apartments to rent.
Take a look at these main causes of bad credit:
A person’s payment history makes up 35% of their credit score. If you have made delayed payments for over a month, the creditor might report the information to the credit bureaus. This info is recorded in the credit report. If you consistently delay making payments to lenders, credit card companies, or utility providers, it will affect your credit score. If bad credit isn’t repaired, it leads to the credit score being categorized as poor or very poor. When that happens, your chances of loan approval are significantly reduced.
When creditors can’t secure payments from a borrower, they can hire third parties to enforce the collection process. Most creditors hire or sell the delinquent debt to debt collection agencies, before or after charging off their account. When delinquent accounts are sent to collections, the information is captured in the credit report. It is imperative to repair this data, or else it becomes tough for creditors to provide loans to a borrower with a history of poor collection.
If an individual is unable to pay off debts, they might be forced to file for bankruptcy in order to receive legal protection. Filing for bankruptcy is an extreme measure, and often kept as a “last resort”. It is the most damaging event to someone’s credit score. When a borrower files for bankruptcy, the information is recorded in the credit report and remains there for several years. Due to the complexity involved in bankruptcy cases, most lenders steer clear from giving loans to borrowers with a history of bankruptcies and court cases relating to their financial situation.
If an account has become delinquent for too long, the creditor charges off the account. A charge-off means the creditor has basically given up trying to get the borrower to make payments. Thus, it leaves a black mark on the credit report. When an account is charged off, the account holder can’t make purchases with it. When a charge-off occurs, the borrower still owes the charge-off balance to the creditor. The unpaid charge-off causes the credit score to plummet. The information of the account getting charged off is reported to the credit bureaus, and it remains in the credit report for many years.
Defaulting on loans
Loan defaults are treated the same way as an account charge-off. If you miss more than one payment and haven’t paid it at the end of the month, the account is marked as in default. Consequently, the lender forwards this information to the credit bureaus and it damages a borrower’s credit reputation. When prospective lenders access the information, they view the borrower as a credit risk who is highly unlikely to repay back loans.
It is important to ensure you make your payments and clear off debts on time, in order to avoid getting stuck with a poor credit score.