debt

Credit scoring no-nos

Unfortunately, some financial missteps do more than ding your credit. Some can ruin it for a long time. Here are some of the more egregious credit mistakes people make and tips for guiding the journey back to good credit.

Late payments

Payment history is an important factor both in terms of your credit score and as a deciding factor for lenders and others who check your credit. Lenders may be less likely to lend to you or may charge you a higher rate based on your payment history. Even without your knowledge, in most states, auto insurance rates are determined largely by your credit score.

Poor payment history can also affect your ability to get a job. Employers look at your credit report, rather than your credit score, when they look at consumer reports (background checks) to build a picture of you, particularly if you are being considered for financial or higher-level jobs.

The good news: The impact of this negative lessens over time. The formula goes something like this: One year out, late payments count as 93 percent negative, at two years, 60 percent; three years, 33 percent; and by four years it's down to 22 percent negative.

Court action

This is territory in which you never want to tread. You'll see activity here on your credit report if you have judgments against you -- say you skipped out on rent or utility bills. It usually falls under the heading "negative information" and stays on your record for seven years.

Tips: Unsatisfied judgments are worse than those paid off. Reach out to the original creditor and come to an arrangement. Typically, judgments are not reported with the company through which you got your judgment, but rather go through third party agency that deals with courts. They are not quite as quick as with credit card companies in reporting accounts as satisfied. You may want to submit a dispute to the credit reporting agency stating that the account has been satisfied.

Also, you could add a statement to your credit report explaining why this mark is uncharacteristic of you. Perhaps you got in a bad situation with large and unexpected medical bills and that set you back. Adding a comment may help you with lenders who look at full reports, which mortgage lenders do.

Bankruptcy

This is something that will work against you longer than most mistakes, lasting 10 years on your credit reports. Bankruptcy is very significant to lenders and has a huge impact on your credit score. Since it's a proxy for measuring how likely you are to pay debts in the future, bankruptcy proves that at one time you were not able to. There is a good chance this information will show up quickly on your report.

What to do: Be proactive and upfront with your bank if you're looking for a mortgage. This isn't something that will slip by them. But if you're looking for a job, let them bring it up first. You don't want to call their attention to information they might not have.

Foreclosure

Here's another significant event that is impacting a growing number of Americans right now and one that will have a negative impact on credit scores for years to come. How negative depends on the person or agency looking at it, but by the time you are foreclosed upon, your payment history has already taken a significant blow, so it's a double whammy.

Lenders know that foreclosure is expensive and use it as a solution of last resort. Always be in contact with your lender if you land in dire financial straits. They will usually try to work with you, either setting up a payment schedule or forbearing your loan while you try to sell your house.

You'll know if your employer or potential employer is about to see this information, or has made a decision against you based on it, because you have to permit their check of your credit report.

Tips: Be proactive with your lender before foreclosure and with banks after foreclosure. As with bankruptcy, you can try adding a comment to your report. Only time will heal a foreclosure's impact on your score.

Debt collection

Once you're referred to collection it's up to the collection agencies to report that you have a collections account. Being placed in collection is more negative than just being late on payments.

Tip: Pay off past-due accounts. Don't expect the inactive status to make this negative mark fall off your report any faster.

Put a brief "consumer note" on your report explaining this uncharacteristic lapse. It won't change your score, but if an actual human being is reviewing your credit application, he or she will see it and can consider it when making a decision about doing business with you.

Carrying too much debt

Thirty percent of your FICO score is based on your debt-to-credit ratio. The higher the utilization of your credit, the greater the negative impact on your score.

Be aware that depending on at what point in the statement cycle your credit card company reports figures to the credit reporting agencies (Equifax, TransUnion, Experian), even if you pay credit card balances in full each month, you may appear to be overextended. The smartest idea in terms of your credit score is to spread charges over several cards so you never use more than 35 percent of your credit limit on any one card at any given time.

Tip: Cut your debt using these proven methods.

Source: Rebecca Kuehn, assistant director of the Division of Privacy and Identity Protection at the Federal Trade Commission.

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