You can find lists of things that you wouldn’t normally think would hurt your credit score. Unpaid library fines, small bills you never received and annual fees for canceled credit cards are on that list. However, these things only have a minor impact on your credit score. Let’s look at some of the worst things that could happen to your credit.
A bankruptcy has the greatest impact on your credit score of anything you could do. A liquidation bankruptcy is worse than a debt repayment plan supervised by the courts, but both make you an untouchable to creditors for years afterward. You may be eligible for a installment loan for bad credit if it is based on your income, if you have regained full control of your income. Avoid installment loans if you’re still on a debt payment plan or at risk of having your wages garnished.
A foreclosure leaves an incredibly bad mark on your credit report. It may not be your fault, such as when you get divorced and no one is willing to pay the house payment. A short sale is not quite as bad, though it still hurts your credit. A deed in lieu of foreclosure, sometimes jokingly called jingle mail, is about as bad. That’s when you willingly surrender the house to the bank instead of making them go through foreclosure. They don’t have to spend as much on legal fees evicting you from the house and taking possession.
Foreclosure refers specifically to losing one’s home. Losing any other type of property is referred to as repossession. Repossession popularly refers to when the lender sends a tow truck to haul off your car or other vehicle. It can occur with other types of property, as well. They could arrive to repossess the big screen TV or furniture you have on payments. Industrial equipment could be repossessed, as well. Anything you’re leasing could be repossessed, as well. Rent handbags and clothing, and the creditor could theoretically enter your home to take it back. Rent furniture for an event, and they can come get it when you’re done with it or after you’ve stopped paying for it. On the flip side, failing to pay your storage unit fees, and they can sell the items at auction to pay the money you owe. That hardly affects your credit, but it can cause serious problems if they sell valuables like a car you left in storage.
What should you do if you’re unable to make the payments on your car, RV or other toys? Giving it back to the lender and taking out a loan for the difference between what you owe and the value of the item is less of a hit on your credit. It is similar to the difference between a foreclosure and a short sale of your home.
A Bad Debt Consolidation Plan
Debt consolidation plans are not all the same. It is one thing to talk to a counselor who helps you get on a tight budget, prioritize expenses and start paying down debt. They may help you negotiate down your debts with creditors, getting late fees and interest forgiven in return for full payment of the remaining balance. However, services like this often promise to help you though they’re ruining your credit. For example, some debt “counselors” suggest stopping all debt payments for a few months. This kills your credit score. Their advice is to save this money into a fund you can use to settle the debts. Then they offer your creditors less than what is owed. Since you haven’t been making payments, they’re more likely to accept half or less what they’re owed. The problem is that this is almost as bad as bankruptcy in what it does to your credit report. Consumers are often swindled by these services, too. For example, they may ask for a power of attorney document that lets them negotiate debt settlements on your behalf, and they take thousands of dollars in fees for this “service”. Yet you could have done the very same thing yourself, and you’d have had more money to direct toward your debts. In a worst-case scenario, they take the fees and do nothing except close shop and disappear. Now you’re out the thousands of dollars, your creditors are calling, and your credit is trashed.
Every charge-off by a creditor hurts your credit. Every time they decide your debt is no collectable hurts you. And they’ll remain on your credit report for seven years after the date they were reported delinquent. Since many companies wait for six months of non-payment to count it as delinquent, it could sit on the credit report seven and a half years after your last payment.
Debts Going into Collections
Any debt that goes to collections will hurt your credit report. Little debts you didn’t realize you owed that go to collections hurt your credit score. Larger debts going into collections are even worse.
This does create interesting problems. For example, making payments on debt that you no longer legally owe could restart the clock. If it was discharged in bankruptcy or settled, making payments could restart the clock and allow them to list it as valid, active and past-due debt. This is why you should demand proof from a debt collector that the debt is valid and not expired before you just pay the debt.
The worst debt collectors try to collect debts owed by someone else. It may be someone who has the same name or is simply related to you. You are not obligated to pay these debts unless you are a co-signer or were married to the person at the time the debt was incurred. They cannot put the debt on your credit report, though they may threaten this and other legal action.
What if you owe the debt and can’t pay it? Ignore it, and it may result in a lawsuit. This sounds scary, but it shouldn’t be. You might be told your paycheck or bank account is being garnished for the debt. Or you can talk to an attorney who will understand that you can’t pay it. You can also hire an attorney to deal with the issue. At some point, it will move to a charged-off status.