Contents
What Is Credit?
What Is Bad Credit?
How to Repair Bad Credit
How to Order Your Credit Report
How to Review Your Credit Report
How to Fix Credit Report Errors
Your Credit Score
Credit Cards and Good Credit
How to Apply for New Credit
How to Improve Credit by Banking
How to Stay on Top of Your Bills
How to Get Credit Help
Divorce and Credit
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What Is Bad Credit?
Since credit plays such a critical role in your financial life, it’s important to maintain good credit if you already have it or to repair your credit if your credit history is spotty. The first step in either case is to know the causes of bad credit.
The Causes of Bad Credit
Each entry in your credit report can be either positive or negative. A positive entry reassures a creditor that you’re likely to pay back money loaned to you. A negative entry indicates that you may not pay back the debts you owe.
Patterns of Bad Credit Behavior
A single negative entry will cause your credit score to dip but won’t hurt your score enough to give you bad credit. But a pattern of negative entries, such as those listed below, will definitely result in bad credit.
- Late or missed payments on loans or credit cards: Creditors will hesitate to lend to you if you show a history of missing payments, making late payments, or making payments that are less than the minimum due.
- Too much outstanding debt: Creditors will hesitate to lend to you if the total debt you’re carrying seems likely to hamper your ability to repay any new credit.
- Too much credit: Having more credit than you need, such as multiple credit cards, can suggest to creditors that you may be reckless with credit or that you might be shifting your debt back and forth between credit cards to make your payments. Just applying for too much credit will negatively affect your credit.
- Lack of credit history: Though it may seem unfair, creditors will hesitate to lend to you if you have very little credit history—even if that history contains no negative entries. For that reason, it’s a mistake to avoid using credit simply to keep your credit history clean. Instead, do use credit—but do so responsibly.
Serious One-Time Credit Issues
Though a single missed payment on your credit report won’t destroy your credit, certain financial difficulties and credit events are so serious that the appearance of just one will have a major negative affect on your credit.
- Bankruptcy: A legal declaration of your inability to pay debts to creditors
- Charge off: A creditor’s decision to give up on recovering debt you owe because you’re unable to pay
- Collection action: A creditor’s decision to sell or outsource the collection of your debt to a debt collection agency
- Wage garnishment: A process in which a creditor obtains, through a court order, the right to take part of your salary directly from your employer in order to make up any payments you may owe
- Tax lien: A government claim on your property for the amount of unpaid state or federal taxes
- Foreclosure: A legal process in which the grantor of a mortgage takes possession of and sells the mortgaged property after the borrower fails to make the required mortgage payments
- Repossession: The forced surrender of property following a borrower’s failure to make payments
Identity Theft and Bad Credit
Bad credit can also result from identity theft, which occurs when someone uses fraud to impersonate you to create and use credit accounts in your name. If you’ve been a victim of identity theft, there are steps you can take to remove the undeserved negative entries on your credit report. (See the Quamut Guide to Preventing Identity Theft.)
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