Common Causes of Bad Credit

Common Causes of Bad Credit

The case of bad credit initiates when the lender or creditor reports the information to the credit bureaus for making late payments or defaulting on payments altogether. The information is recorded in the individual’s credit report which is used by the lenders and creditors to make decisions on whether or not to extend credit to prospective borrowers.

An individual who has applied for credit card or borrowed money will have an active credit file in one or more of the three credit bureaus. All the past credit transactions and events such as loan applications, number of approved/rejected loans, approvals/rejection of credit card, credit card loans, foreclosures, etc. are recorded in the individual’s credit report. Creditors and lenders use this information to make lending decisions.

An individual’s credit report is also used to calculate their credit score which highlights the level of risk associated with lending money to specific borrowers. Based on that credit score lenders decide whether or not to extend credit, amount of loan they are willing to offer, and the interest rate.

Main Causes of Bad Credit

Bad credit is caused by the following key factors listed below.

  • Late Payments: An individual’s payment history has a proportion of 35{394614724c57273a4c595be81299e7b9f866b52ebec43b48050cccd37d9cdd0a} in their credit score. If you have made defaults or delayed in making payments for more than a month, the lender might have reported your case to the credit bureaus. The reported information will also be recorded in your credit report. If you consistently make late payments to lenders, credit card companies or utility providers, it’ll affect your credit score. If the bad credit is not fixed, it’ll lead to the credit score being classified as poor or very poor which may reduce your chances of getting approved for a loan.
  • Collection Accounts: When creditors fail to recover payments from the borrower, they use third-party to enforce the collection process. Creditors usually hire or sell the delinquent debt to debt collection agencies before or after charging off their account. The information of delinquencies is captured in the credit report, resulting in lower credit score and making it difficult to utilize other forms of debt.
  • Filing for Bankruptcy: The most damaging event to any entity’s credit score is when they file for bankruptcy. It happens in extreme cases, when an individual or company is unable to pay debts; they file for bankruptcy to receive legal protection. The information regarding this matter will be recorded in the credit report where it stays for seven years. Lenders avoid lending money to borrowers with history of bankruptcy and court cases relating to financial matters. 
  • Charge-offs: When the creditor gives up trying to get the borrower make payments, it leaves a black mark on their credit report. It’s called charge-off. When the account is charged-off, the account holder will unable to make transactions with the account. Charge-off doesn’t mean the amount of debt is waived off; the borrower still has to pay the charge-off balance to the creditor. The information regarding charge-off remains in the credit report for seven years since the time account became delinquent.
  • Defaulting on loans: When a person misses more than one payment and doesn’t pay at the end of the month, their account is marked as default. The information regarding payment defaults will be forwarded to the credit bureaus. It also damages the borrower’s credit standing. When prospective lenders access information, they will avoid offering loan to the borrower with credit risk.