Building up your credit score is an important part of financial independence and stability. A good credit score is key in qualifying for a mortgage, rental and insurance rates, car purchases, and other vital, often unavailable expenses. The good news is that smart credit card maneuvers, such as keeping credit card spending below 30% of your limit and paying everything back on time, remain on your credit report for a long time, consistently showing you to be a responsible borrower.
The bad news, however, is that negative items on your credit report tend to stick around just as long. Credit reports show your entire history, for better or worse. There are a number of items to watch out for on your credit report, most of them negative, though with a few positive exceptions. Let’s cover a few of them here.
Bankruptcy is the publicly recorded inability to pay off debts. There are two types of bankruptcy, Chapter 7 and Chapter 13. With Chapter 7 you liquidate your assets, put up property to be sold, to pay off the debts. In the case of Chapter 13, you are not forced to sell property, but instead create a payment plan to pay off some to all of the debt owed.
Chapter 7 bankruptcy stays on your record for 10 years, while Chapter 13 stays for 7 years. The less recent the bankruptcy the less of an impact it will have on your credit score, which can improve after a bankruptcy.
Late payments can be accidental scars on your credit score. A late payment can stay on your account for 7 years.
In the case of federal student loans, you have to be even more careful. Federal student loans go to default status if payments are missed for 9 months, which means the entire amount, plus interest, is owed, disqualifying you for repayment plans, access to additional loans, and even getting your tax return back.
After some time, creditors may stop trying to collect on debt you owe them and change the receivable owed to a loss. This is defined as a charge off, and remains on your credit report for 7 years from the date of delinquency, even when paid off.
After a debt is shifted to a charge off, creditors may also pass the account on to a collections agency who will report the account to the credit bureaus while they attempt to collect payment on the debt. It’s important to resolve past due balances as soon as possible, to avoid them going to collections agency. Accounts in collection status will have a negative impact on your credit score.
Getting your credit score pulled shows up on your history for 25 months, or more. Applying for credit results in a hard inquiry, and this will have a negative effect on your credit score, and remain on your report for around 2 years. The overall damage is minimal, though it’s good to know that pulling credit sticks around in your record. If you pull your credit for educational purposes, soft inquiry, it will not have a negative impact on your credit score or report.
Building credit history is not all about watching out for negative items. If you are responsible with your card, and pay back your purchases and loans on time and as agreed, that information can stay on your history indefinitely. The bureaus may remove this information after 10 years, though that’s still a long time to boast about good credit news.