Your finances are an important part of your life and future. Financial responsibility and sound decision-making about your money now can save you money down the road and make it easier for you to obtain loans when you need them.
On the other hand, poor decisions now can hurt you for years to come. A bad financial history can preclude you from buying a car or house, and it may even prevent would-be employers from extending job offers.
Many people don’t have a firm understanding of exactly how their financial situation affects other aspects of their lives. But it’s important to know your financial rights and responsibilities, especially when you find yourself with too much debt.
Armed with the basics of credit and debt, you’ll be able to find resources at your disposal and seek out the help you need to get back on track.
To understand your debts and how they can hurt you, you need to understand the basics of your personal credit: find out what information appears on your credit report, how it affects your credit score and why it matters.
What is a credit report and why does it matter?
Your credit report is a review of your financial history and level of responsibility. It includes information about your payment histories on loans and debts. It also includes a summary of all your debts such as student loans, mortgages and credit cards.
Potential lenders, landlords and employers are among those who can view your credit report. A good credit history can qualify you for low interest rates on loans and credit cards. A bad history may subject you to higher rates and may even prevent you from receiving job or lease offers.
What is a good credit score?
Credit scores range from 300 to 850 and is a one-number reflection of your credit history. A high score says you’re a good investment and are likely to pay back your loans. A low score says you may not have the ability to repay debts or that paying them back is not the priority that it should be.
There is no specific cutoff for a good score or a bad one. Every lender can have specific guidelines about credit scores.
For some, individuals must have a score of 720 or 740 to receive the best interest rates and lowest fees. For others, the cutoff could be as low as 620.
Having a score lower than a lender’s top cutoff doesn’t necessarily bar you from obtaining credit, but it will likely result in higher interest rates.
How do I request a copy of my credit report?
You’re entitled to one free credit report every 12 months from each of the national credit reporting bureaus: Equifax, Experian and TransUnion. You can request a copy of your credit report even if you’ve already received one within the last year, but you’ll have to pay a small fee.
Request a copy of all three of your credit reports. Request your free annual credit report by calling (877) 322-8228.
Use this as an opportunity to verify the information in your credit report. If you find errors on your report, contact whichever credit reporting company you believe made an error. You can start a dispute with Experian, Equifax or TransUnion.
Will checking my credit report lower my credit score?
Short answer: No. Credit reporting agencies understand the importance of you reviewing your credit history and other credit data.
However, there is a way your score can be damaged when someone else requests your credit report. If you apply for several new lines of credit in a short period of time, this can indicate that you may be a greater risk for potential lenders. Although your score may drop, the change is typically less than five points.
Should I close lines of credit I’m not using?
Typically, no. (It’s also not a good idea to request lower credit limits.) While these things may help curb your spending, it can actually hurt your credit score.
Your score takes into account the gap between your debt balance and your total credit limit. It does not distinguish between a forced limit reduction and a requested limit reduction.
A larger gap between your balance and your limit implies more fiscal responsibility. So when you reduce your overall credit limit, even voluntarily, your score can decrease.
How long does negative information remain on a credit report?
Most negative information (like late payments) remains on your credit report for seven years. Some information remains longer.
A lawsuit or unpaid judgment against you stays on your report until the statute of limitations runs out or for seven years, whichever period is longer.
A bankruptcy filing stays on the report for 10 years, and a criminal conviction may stay there permanently.
How can I improve my credit score?
Financial experts have five basic recommendations for improving your credit score and keeping it high:
- Check your credit report periodically and dispute anything you believe to be incorrect. Errors, inaccuracies and old information may be bringing down your score.
- Pay your bills consistently. If necessary, set up reminders so you remember to pay them on time every month. Contact your creditors directly if you’re having trouble making payments. They may be able to work out a payment plan with you.
- Decrease your total debt. Rather than moving debt from one line of credit to another, focus on lowering the total amount you owe. This includes keeping credit card balances low, as higher balances can harm your score.
- Don’t close old credit accounts. Long-established credit accounts can help your score.
- Apply for new credit sparingly. Although it increases your total available credit, opening several new lines of credit in a short period of time can actually hurt your score.
How does divorce affect my credit report?
A divorce itself won’t affect your credit, but your ex-spouse’s actions can reflect on you after the fact.
If you opened any joint accounts — ones with both your names on them — both of you assumed responsibility for the debts. This doesn’t change after a divorce proceeding.
Even if your former spouse took responsibility for certain joint accounts, you still may be held accountable for outstanding mortgages, auto loans and credit card balances. So if your ex-spouse makes late payments to these debts, they’ll hurt your credit.
The best way to avoid being affected by your ex’s credit standing is to pay off and close any joint accounts. In addition, creditors may let you to convert a joint account into an individual one.
Speak with each creditor separately to find out if they can do this. And be sure to remove your former spouse from your credit card accounts if he or she was listed as an authorized user.
If you find yourself in financial trouble, know that you have several options to help you reduce your debts, the last and most drastic of which is bankruptcy. But before you decide on bankruptcy, review all your other options. If you don’t need to declare bankruptcy, it’s better to avoid it.
What is credit counseling?
A credit counseling organization can help you get your finances back in order if you’re struggling to repay debts. Many are nonprofit and will provide counseling services free of charge, but be aware that some companies hide their fees.
A counselor can help you develop a budget and give you personalized advice for paying off your debts. If your finances are in worse shape and you require further assistance, a counselor can help you enroll in a debt management plan or may steer you toward debt settlement or debt consolidation programs. While credit counseling itself does not affect your credit score, these further programs may harm it.
What is a debt management plan?
When you participate in a debt management plan (DMP), you stop paying your creditors directly. Instead, your monthly payments are sent to your credit counseling organization, which then pays each bill for you.
In exchange for your participation in a DMP, your creditors may lower your interest rates or waive certain fees, saving you money.
What is debt consolidation?
Similar to a DMP, debt consolidation allows you to combine several monthly payments into one. And like a DMP, it can also help you receive lower interest rates and fees.
But this is done very differently from a DMP and can have different consequences. By consolidating with a debt consolidation firm rather than a credit counseling agency, you typically turn unsecured debt — like credit card debt — into a secured debt — one backed by property like your home or car.
If you fall behind on your payments, you risk losing whatever property is connected to the debt. You may lose your home to foreclosure or your car to repossession. It’s especially important, therefore, to make sure you can afford monthly payments before you consolidate your debts.
What is debt settlement?
A successful debt settlement directly reduces the amount of money you are required to pay your creditors. You or a debt settlement firm will negotiate with your creditors and attempt to persuade them to reduce what you owe.
Creditors have no legal obligation to consider settlements, so there is no guarantee that the settlement firm will be successful.
Bankruptcy is a type of financial assistance reserved for people with no other options. It helps people gain a fresh start by erasing their debts. But filing for bankruptcy does have lasting consequences.
How much will bankruptcy hurt my credit report?
Bankruptcy stays on your credit report for 10 years. When you first declare bankruptcy, your credit score could drop 200 points or more.
But understand: If you’re considering bankruptcy, your credit score and credit report are probably already damaged. In these instances, bankruptcy will not damage your record to the same extent.
Will bankruptcy clear all my debts?
Bankruptcy can discharge all or most of your debts. The total amount depends on the type of bankruptcy and the types of debt.
If you file under Chapter 7, bankruptcy will immediately clear all or most of your debts. It won’t get rid of some student loans, recent debts or any debts incurred because of fraudulent actions.
If you file under Chapter 13, you’ll be required to repay a portion of your debts over a period of three to five years. If you successfully complete the payment plan, then the remaining balances are forgiven.
Bill “No Pay” Fay has lived a meager financial existence his entire life. He started writing/bragging about it seven years ago, helping birth Debt.org into existence as the site’s original “Frugal Man.” Prior to that, he spent more than 30 years covering college and professional sports, which are the fantasy worlds of finance. His work has been published by the Associated Press, New York Times, Washington Post, Chicago Tribune, Sports Illustrated and Sporting News, among others. His interest in sports has waned some, but his interest in never reaching for his wallet is as passionate as ever. Bill can be reached at email@example.com.
- Nickel, G.M (2004). Credit Smart: Your Step-by-Step Guide to Establishing or Reestablishing Good Credit. Naperville, IL: Sphinx Publishing.
- Weston, L. (2012). Your Credit Score: How to Improve the 3-Digit Number that Shapes Your Financial Future. Upper Saddle River, NJ: FT Press.
- Board of Governors of the Federal Reserve System (2011). Credit Reports and Credit Scores. Retrieved from http://www.federalreserve.gov/creditreports/pdf/credit_reports_scores_2.pdf
- FICO (2012). Credit Inquiries. Retrieved from http://www.myfico.com/crediteducation/creditinquiries.aspx
- Federal Trade Commission (2011). Your Access to Free Credit Reports. Retrieved from http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre34.pdf
- Experian (2012). Divorce and Credit. Retrieved from http://www.experian.com/credit-advice/topic-divorce-and-credit.html
- Federal Trade Commission (2011). Knee Deep in Debt. Retrieved from http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.pdf
- FICO Banking Analytics Blog (2011). Research looks at how mortgage delinquencies affect scores. Retrieved from http://bankinganalyticsblog.fico.com/2011/03/research-looks-at-how-mortgage-delinquencies-affect-scores.html
- You will need Adobe Reader to view the PDF Download Adobe Reader