The shelf life of bad credit

The Shelf Life of Bad Credit

When a credit card bill, loan payment or other financial obligation is not paid as agreed, lenders may send a negative report to credit reporting agencies such as Equifax, Experian, and TransUnion, known in the U.S. as “the big three.” According to Equifax, consumers inquire most often about how long negative information will remain on their credit report.1 Considering the importance of a good credit profile and credit scores, it’s not surprising that this is a topic of great concern among consumers. As you might know, a bad credit score can affect your ability to qualify for a loan, rent an apartment or even get a job.

According to the Fair Credit Reporting Act (“FCRA”)2, negative information can remain on your credit report for up to seven years.3 Additionally, bankruptcies will follow you for 10 years, and unpaid tax liens stay in your credit history indefinitely. Those kinds of scenarios can be very daunting. For example, in the next seven to ten years you may need a new loan, such as a car loan or credit card. A low credit score can cause you to be denied for a loan, or may mean a higher interest rate, or larger down payment requirement.

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Myths and facts about your credit score

The Truth and Fiction About Your Credit Score

As with many financial topics, credit scores are often misunderstood, creating myths about them and how they may affect you. Understanding how credit scores work is important because it can impact so many aspects of your daily life. Here are a handful of myth busters to help you get a better picture of the truth and fiction of credit scores:


Errors — You may have thought that your credit report is generally very accurate. However, the Huffington Post reports that 80 percent of all reports contain a big error.1 That means it’s probably in your best interest to be proactive and check your report routinely. Don’t wait to find out that you have an issue.


Inquiries — Many believe that pulling your own credit report will negatively affect your credit score. Actually, those types of inquiries have no effect on your score. However, when a lender pulls your credit because you’ve applied for a loan, their inquiry (also known as a “hard inquiry”) may have a small negative impact. Keep in mind that if you apply for several credit accounts, which create hard inquiries, in a short period of time, collectively they may have a greater impact on your credit. The exception is applying for loans when you are shopping for an auto loan or mortgage. The reporting agencies tend to see those types of inquiries as single versus several when they occur in a relatively short period of time.2


Cash — When someone has credit problems, their first inclination might be to go to cash only to fix their problem. While there’s nothing wrong with using cash to manage your budget or finances, just using cash will not correct any credit issues you have. Besides, you can’t build a healthy credit profile unless you use your credit and use it wisely.


Quick Fixes — Debt settlement and consolidation services may promise a quick fix, but as with most challenges, there simply aren’t any. The most effective way to improve your credit score is to pay your creditors on time and pay down the amounts you owe them.


More Income = Better Credit — Income level actually has no impact on your actual score. People that have a higher income do not automatically have a higher credit score, or a better credit history. However, income can play a role in lending decisions, along with your score, your employment history and the amount of debt lenders believe you can manage.


Credit Scores from the Big Three are the Same — Most lenders and creditors now report information to the three big credit-reporting agencies — TransUnion, Experian and Equifax. They are all separate companies, so the rate at which they update reporting information and what information gets updated is different.3 Thus, your score will likely be different with each at any given time.


Perhaps the biggest lesson learned here is that when it comes to your credit, it’s important to always know where you stand and to understand how your credit can both work for you and hurt you. For more information and insight on credit scores, check back for other articles on the topic.





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