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The modern credit conscious consumer is very concerned on how collections and repeated credit inquiries affect credit scores. In a short article, I’ve created a top down list of the most damaging to the least damaging items that impact credit scores. My research and opinion is based off of reviewing thousands of credit reports and working with borrowers over the years to raise credit in an ethical way.

By ethical, I mean that I didn’t engage in any *credit repair* practices. I’m using the term as it commonly applies to the process of getting valid negative items off of credit reports by contesting their accuracy or validity with credit bureaus.

Also — in all of the following scenarios I use terminology such as “affected by XXX points” or “drops by XX points”, etc. I mean to imply the effect on the credit score that YOU would have had you found yourself in one of these situations.

Item 1: Public Records

Although tax liens and judgments are considered public records, the types that damage credit scores are: bankruptcies, foreclosures, and repossessions.

Bankruptcy

Though bankruptcies take 10 years from the discharge date to clear up off of a credit report, most borrowers can get a high interest home loan in 6 months. High interest credit cards and auto loans for post-bankrupt consumers are a huge market. Within 7 days of discharge, it is not uncommon to notice a flood of solicitations for credit and auto loans.

Bankruptcies derail your credit score putting it at best in the mid to high 400s. It is important to start recreating revolving account history right after the bankruptcy and it is not uncommon to have a 660 credit score within 1 year of discharge.

Foreclosures

Unfortunately, foreclosure activities make it very tough to get back into a home without a significant down payment. After a foreclosure, a credit can be in the low 400s due to all the default activity on the credit report. In aggressive or “loose” money markets, lenders may be willing to finance a buyer for a purchase with no money down and documented income within 6 months of foreclosures. In tight money markets however, the lending requirements change to provide for a down payment (at least 5%), fully documented income history and the borrower must qualify at the high interest rates of the loan. In other words, a borrower must show that they are able to make the monthly housing payments, taxes, insurance, plus pay their other monthly liabilities (car loans, credit cards and any other debt) and have it all add up 45% of their gross income.

There are some government assistance programs available for foreclosures that were due to economic hardship. Contact us to find out more about these programs.

Repossessions

Repossessions are the least damaging of the big 3. Typically, a repossession will result in collection activity by the lender and together both will set you in the high 400s to low 500 scores until you resolve the outstanding debt. After the debt has been resolved, within a year of re-establishing credit, you can reasonably expect your credit score to jump back into the 600s.

Mortgage Lates, Car Loan Lates, Credit Card Lates

30 day lates within this category can damage your credit score by at least 50 or more points. 60 or 90 day lates, or 30 day late payment on multiple accounts can drop it by 100+ points. 30 day lates with mortgages puts the borrower in the subprime credit category for the next 2 years. Doing credit repair for mortgage late payments is usually fruitless (click here to find out why).

Maxed Out Credit Cards

A good but general rule of thumb to follow is that if credit card balances are 40% of the max credit limit, a credit score will affected by about 10 or 20 points. Anything over 40%, and the credit score drops exponentially. In my research, balances that are over 40% of the credit limits affect credit scores by as much as 100 or so points. If multiple credit cards are maxed out or approaching maximum balances, one can be assured that the credit score will be off by at least 80+ points. Contrary to popular belief, the *easiest* way to raise your credit score is to pay off your credit card balances. Credit scores are not nearly impacted to the same degree by paying off derogatory, or collection items.

Collections and Inquiries

This section is the least damaging of all the other categories above it. Collections and inquiries do impact credit but in most cases, the impact is short term and easily resolved. If a collection is going on your record, no one is going to grant a loan to you until it is paid. Plain and simple. In the short term, collections have the ability to damage your credit anywhere in the range of 50 - 75 points. Latent collections, as in those that have been on a credit file for more than 6 months, don’t seem to have that much impact. As a matter of fact, there is a parallel school of thought that advises borrowers and the credit conscious to leave old collections alone as reviving them may do more damage than paying them off.

I am not a fan of that theory and I’ve seen no evidence to prove it. In other words, I have never paid off an old collection and saw someone’s credit score go down. But, on the other hand, I have seen borrowers with 620+ credit with multiple small collections dating back years on their credit report.

Finally, inquiries are usually a “blip” on the radar screen. If you are shopping for a car or mortgage loan and multiple vendors check your credit, the impact of doing so is cleared up within 30 days. Even though your credit score may drop by 5 - 10 points within those 30 days, afterward it usually shoots right back up.

Want to Learn More About this Subject and What You Can Do?

Visit my new ebook on the matter http://www.thecreditmonster.com

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Filed under: Boosting Credit