Published on June 9th, 2018
For maintaining good credit score, you have to maintain fiscal discipline in borrowing. Limiting the number of credit lines and disciplined spending helps the cause.
Uncontrolled spending leads to misery because it opens the floodgates of loans and credits that ultimately push down credit scores. However, faltering in paying back loans is a significant reason for dwindling credit scores, but you must understand the bigger picture.
While you must control certain actions that can have a negative impact on the credit report that affects the credit score too, you must be aware of the various forms of non-payment of loans and credit lines.
Avoid the lure of sign-up bonus and good grades rewards offered by some companies for acquiring new credit cards, as you would be risking your credit score again.
How well you can organize personal finances plays a vital role in managing debts in a better way which is the way to earn high credit score. In this article, we will discuss what issues and activities could hurt your credit score so that you stay away from it.
Failure to make payments for loans is a very broad term, but no matter how it happens, it damages your credit score. Many different types of non-payment could come under this category as mentioned below.
1. Missed payments
The worst thing that can happen is that you miss a payment date. It could be that you try to make good as soon as you realize that you have missed a payment, but still, you cannot avoid hurting your credit score.
Missed payments are blemishes that appear in dark ink in the credit report. For rating creditworthiness, there is no difference between missed payments and late payments as both are equally bad.
The most concerning aspect is that the black spot remains on record for seven years from the date of occurrence.
You might express your inability to pay off debts and convince the lender to accept your request for charging off the debts.
It means that the lender accepts the fact that it will not be possible to get back the money you owe them and they agree to write off your account by accepting the loss.
Although the charged off account remains closed for any future use, the creditor may still report the balance owed and the past amount due. Most lenders prefer to sell off these charged off accounts to some collection agency.
3. Settled accounts
In case you want to settle a loan account, you have to make the lender agree to accept an amount less than what you owe them. Although you pay less, the debt appears settled in the book of accounts.
However, since you have not paid back the amount you owe, although the account is settled, the activity has a negative effect on the credit report that affects the credit score adversely.
The financial liquidity you achieve by settling the account comes at a cost that you must be ready to accept.
4. Voluntary surrender
If you request a lender that you are ready to surrender the vehicle to them as you do not want to continue with the loan, then this would amount to a derogatory activity from the perspective of debt management.
It would surely have a negative effect on the credit score, and even more, you have to pay the balance amount arising from surrender. Failing to pay the amount, the debt could pass over to a collection agency.
If your inability to pay back debts results in the lender deploying a collection agency to recover the debt from you, it is a blemish in your financial history.
If the lender feels that they cannot recover the debt they might sell it some collection agencies. Either way, be prepared to take a hit on the credit score as the effect is the same as not making payments.
6. Actions that affect credit score negatively
Although timely payments are essential for maintaining good credit score, some actions and decisions in managing debts can adversely impact credit scores.
Closing a credit account reduces the available credit, and this can affect the credit utilization ratio as well as credit history if the account you choose to close is the oldest one that appears in the credit report.
Opening several new credit accounts within a short time also affects credit score negatively. Depending only on credit cards and having no other loans is detrimental for a credit score. It is essential to have a diverse credit mix or else it could be a negative factor in the credit report.
Paying your credit bills and loans on time to create a positive payment history and to ensure that you do not wind up loans midway are some of the best ways to hold on to excellent credit score.