Credit report penalties can cause serious problems for your financial outlook. Each penalty listed on your credit report decreases your credit scores and indicates you are a credit risk to potential borrowers and creditors. This can prevent you from purchasing property, buying a new car, or just getting a good interest rate on a new line of credit.
The more credit penalties you have, the more interest you have to pay. Effectively this means you end up paying more for everything you buy on credit (including your home and car) because interest builds faster.
So you know credit penalties are bad, but do you really know how to avoid them? Some credit report penalties are easy to understand. If you pay a credit card bill late or miss a payment, this causes a penalty on your credit report. If you don’t pay for six months and the account becomes delinquent, this creates a penalty as well. These kinds of penalties make sense, but there are other credit report penalties much less obvious.
Here are some of the most common credit report penalties and how you can avoid them:
Late or missed credit card payments. Failing to pay or being late on the requested amount owed for a credit card bill, changes the status for that account on your credit report. It will stay listed as delinquent until you catch up on your account payments.
- Over credit limit. When you “max out” your credit cards, you can actually cause a penalty to be listed in your credit report. This penalty stays until your account balance is paid off to below your credit limit.
- Charge offs. After a certain point in attempting collection, your creditor may list your account as a charge off. This means your account is frozen and you can’t use that credit line anymore, but a balance is still owed. This usually happens after about 6 months of delinquency on the account.
- Debt settlement. If you settle your debts for less than you owe, this causes a penalty on your credit report which remains for 7 years.
- Too many credit checks. Getting too many credit checks within a certain period of time can cause a penalty to show up on your credit report. Creditors view numerous checks as a sign you’re trying to open too many new credit lines at once. This makes you a higher risk for borrowing, so it gets listed as a penalty on your credit report. Keep in mind there are differences between “soft” and “hard” credit inquiries; only hard inquiries lead to penalties.
- Bankruptcy. A Chapter 7 bankruptcy filing causes a 10-year penalty on your credit report, while a Chapter 13 causes a 7-year penalty on your credit report.
- Foreclosure. This will also cause a 7-year penalty on your credit report. Read more on how to keep your home from foreclosure.
- Unpaid tax liens. These have the harshest credit penalty and stay on your report up to 15 years.
If you’ve had problems with debt and your credit report has suffered as a result, you can take steps to get your credit back on track even before harsh penalty periods end. The “weight” of all credit penalties listed on your report decrease over time in how they factor into your credit scores. So even if you have a bankruptcy or foreclosure penalty, taking positive steps to build your credit now can go a long way in improving your credit rating even before your penalty period ends.
Paying bills on time and paying off debt are great ways to improve your credit rating without paying for expensive credit repair services. If you can’t find a way to pay off your debt quickly on your own, consider contacting a credit counseling agency to get professional advice on how to reduce your debt.