The Basic Trouble Signs

Banks, lenders and credit bureaus look primarily for late payments or delinquencies as a sign of financial trouble. In short, delinquencies are reports that lenders make to credit bureaus when a borrower falls 30 days or more past due on a scheduled payment for a credit account.

Delinquencies are measured in 30-day units. If a credit card payment is due January 1 but you haven’t made it within a few days of February 1, there’s a fair chance that your credit card company will report a 30-day late notice to the major credit bureaus.

If you haven’t made the payment by around March 1, the credit card company will almost certainly report a 60-day late notice to the bureaus. And, if you haven’t made the payment by April 1, the company will report a 90-day late notice.

Lenders and credit bureaus also track payments that go later than 90 days. But most finance companies lump all seriously late payments in a “90-days-or-more” late category.

Delinquency notices are not the same thing as late notices lenders may send you or collection actions they may take. Delinquencies are separate communications between the lenders and the credit bureaus. They don’t mean—necessarily—that an account is under review, suspended or in foreclosure.

A lender might report a 30-day late notice before you even realize you’ve fallen behind. For this reason, many credit card companies and consumer lenders are forgiving about reporting an occasional 30-day late payment. They’ll assume that some simple mistake explains the delay.

However, if you go 60 days late on a payment or make 30-day late payments consistently over several months, you’ll almost certainly have notices in your credit report.

Delinquencies might seem like small matters; but they’re not. They stay on your credit report for years—even if you bring your payments current right away.

Delinquencies have a particularly bad cumulative effect. One 30-day late notice might not hurt your credit horribly; but three or four of them can lower your credit score a lot.

Collection activities and charge offs are the second category of trouble signs that lenders look for in a credit report. These are actions that you will (or should) know about, because lenders warn you in writing that they are going to take the actions.

In consumer credit lending, collection activities (or “going into collection”) can mean the lender turns your account over to an in-house collections department or it turns the account over to an outside collection agency. For you, the outside collection agency is usually worse, meaning more letters and angry telephone calls. But, to your credit report, going into collection is bad—whether the collector is in-house or an outside agency.

A charge off is a slightly worse version of going into collection. It means the lender has given up on collecting the debt and is writing off the amount from its active accounts. The lender retains the legal right to collect the debt but, at present, it’s counting the debt as uncollectible.

A charge off is to unsecured debt what a foreclosure or repossession is to secured financing. It’s very bad for your credit—sometimes worse than a bankruptcy filing.

Like delinquencies, collections or charge offs stay on your credit report for seven years—even if you pay the amount owed in full. Still, if you can pay the amount in full, you should. Credit reports will show the collection or charge-of item as “paid” or “satisfied.” That minimizes the damage somewhat.

Another trouble sign for lenders is a maxed-out credit line (or several). Even if these accounts are being paid in a timely manner, they raise a red flag and suggest that you may have money problems.

Most credit counsellors suggest moving debt around, if you’ve maxed out one or two credit lines. For example, if you have one maxed-out credit card and several others that haven’t reached their credit limits, you should move some of the debt from the maxed-out card to others.

However, moving debt around is not as good for your credit rating as paying debt off. If you have total unsecured debt that’s more than 20 percent of your annual income, lenders may not want to give you the best deal on a loan—or loan to you at all.

Most lenders look for a pattern of payment rather than focusing on onetime or rare occurrences. So, consistent on-time bill payments will improve any blemishes and raise your credit score.

Next: Problems With Secured Debts