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The following are types of bad debts, which are listed on credit reports:
Late Payments
Late payments add to a lower credit score. A late payment is classified
as a bad or negative debt. A late payment made a few years ago is considered negative
but less negative than a late payment made a month ago.
When you are trying to obtain a major loan, for example a mortgage, late payments listed on your credit report can mean the difference of a ¼, ½ or 1 point of interest, which can cost you several thousands of dollars. If a late payment is made on such a large loan, it is considered a major bad debt especially if combined with other negative items. The length of delinquency is also important (i.e., 30 days, 60 days, 90 days or more). A debt listed more than 30 days late can be considered as negative as a collection or charged-off account. The more late payments made the more negative an account becomes.
Late payments score as a "2", "3", "4", "5" ... the higher the number the more negative the late payment.
Collection Accounts
A collection account is a bad debt. While late payments score
as a "2", "3", "4", "5", the credit scoring system categorizes collection accounts,
charged-off accounts, profit and loss accounts, repossessions, foreclosure, liens,
child support and almost any other negative credit item (except late payments), into
a category of a "9". A score of "9" is the most negative score you can get on a credit
report. The more collection accounts you have the more negative the bad debts are.
In addition, it does not matter how much money is owed on the debt. If you owe a
collection in the amount of $5.00 and you owe a collection in the amount of $500
they both score "9".
Additional information regarding collection accounts is that paying one off does not necessarily help your credit scores. Even though we know it is the right thing to do, many times paying off a collection account will not help your credit at all. In fact it can actually make it worse by starting a time frame that is used to make a bad debt obsolete causing the bad debt to remain seven years from the date you paid it instead of from the date it was closed (last date of activity). Before making the decision to pay off a bad debt you should understand the results of what could happen if you do and consult with a company who specializes in credit problems because once the damage is done it is hard to undo.
Charge-Off Accounts
A charge-off account is simply a collection that the creditor
is charging off as a loss. By doing so the company is stating to the government that
they had a loss of money on your account, which means a tax break for them. However,
note that this does not mean that the creditor will stop collection efforts in order
to recoup their money. If they can scare you in to paying the debt all they have
to do is report to the government that they now have income from this debt. The same
rules apply to a profit and loss account, which is the same thing as a charge-off
account.
Repossessions
When one thinks of repossession, they usually think it is on a vehicle
because payments have not been made. However, additional items can also be repossessed.
For example, furniture can be repossessed if you were using it as collateral or if
you purchase furniture on a payment plan from a furniture company. If you default,
they can take back the furniture and list repossession on your credit report. It
scores a "9" like all the other bad debts. repossession like this may prevent you
from qualifying to purchase a new vehicle even though the repossession was not that
of a vehicle.
Foreclosures
A foreclosure, usually thought of for a home loan, can also be for other
types of loans. Most people will file a bankruptcy before allowing their home to
be taken from them. Bankruptcy was devised to prevent creditors from taking your
possessions. With the new bankruptcy laws it is very important that you consult with
an attorney when anything affects your ability to maintain payments on your credit
accounts, as you should do whatever is necessary to protect your assets. A foreclosure
is a "9" rated account.
Types of Negative Public Records
The following items are negative public records, which appear on credit reports:
Liens
A lien is normally something a government entity issues for non-payment of taxes.
A lien can actually halt all credit activity even if your credit is otherwise in
good standing. In other words, a new creditor is not going to feel secure giving
you a loan when you have a lien that could take your property from you, especially
if you are applying for a home or auto loan. Even if you are able to remove a lien
from your credit reports, there will be another posting of the lien in a government
lien search, which means if you are trying to get a government loan, such as a student
loan, FHA loan, VA loan, a small business loan, etc., it will be found when they
do this search.
Judgments
A judgment is usually a bad debt taken to the next level. For instance,
your creditor or a collection agency to try and retrieve money will file a suit with
the court. Some creditors are now taking cases to arbitration (it is stated in your
card agreement that they can allow a mediation company to decide the fate of a bad
debt). You will first receive a notice of either arbitration or of a court date.
These notices are sent via certified mail or other verifiable methods. In either
case you need to follow the directions and respond if it is arbitration or show up
in court if it is a suit so that your creditor does not win the case by default judgment
(if you show up at least you have a chance, if you do nothing you have no chance
at all).
Judgments are rated as a “9” and negatively affect your credit. Some creditors will not grant loans to those with judgments on their credit reports.
Bankruptcies
Bankruptcy is another negative public record item. However, individuals
who have filed bankruptcies can obtain a fresh start with their credit if they clean
up their reports after filing the bankruptcy. If this is accomplished, an individual
can score just about as high as someone who has never filed a bankruptcy and has
no bad debts.
Bankruptcy was devised to give people a way out of debt. By giving you a way out of debt you have also been given the way out of a low credit score but only if your credit reports are cleaned up. If you do not clean up your credit reports, you may not be able to obtain credit for seven years or more. However, the average person who files bankruptcy and cleans up their credit reports gets credit within six months to a year. This is the little-known fact of bankruptcies but those who figure it out are buying homes and cars after basically filing bankruptcy just a few months ago.
Child Support Defaults
One of the worst bad debt situations is unpaid child support
payments. Not only can your wages be garnished (money taken directly out of your
pay checks by your employer before you are paid), you can be arrested and put in
jail for failure to pay child support. In addition, defaulted payments are never
removed from your credit reports until they are paid and, even then, this process
can take seven years.
Government Student Loans
A student loan from the government is probably one of the
most destructive loans you can have once you default on them. Not only do defaulted
student loans remain on your credit reports for life if unpaid; they can multiply.
The student loan company reports student loans in semesters, so each semester shows
as an individual student loan and will be reported as negative information on each
loan even if you pay only one of the loans late. Each defaulted student loan will
now become negative. If you continue to default to the point of collection status
then all student loans will go to the same status. It becomes even worse once you
have defaulted for a few months as the student loans will now become negative through
another student loan company and by more down the road if left unpaid. When a new
company picks up the defaulted student loans they will report them all again as defaulted
student loans, so you could end up with 20 collections for four student loans.
The best way to resolve student loan debts is to call the student loan company and asks to be put on a student loan rehab program. If you get on a student loan rehab program and make your payments on time they will remove all negative information about your student loans, which will get you out of the cycle of collection accounts.
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Types of Bad Credit
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