What Financial Hardship Does to your Credit Rating

Financial hardship and your credit rating can be a harmful combination both for your ability to get a loan in the future and for the cost of borrowing to you now. In the right circumstances, financial hardship can lower your credit rating and leave you facing a years' long task of repairing your credit score. The following information explains how your credit rating is determined and what financial hardship can do to it.

What Is Your Credit Rating?

All borrowing you do is reported by your lenders to the three primary U.S. credit reporting bureaus: Experian, Equifax and TransUnion. These companies maintain your credit history, which not only includes a record of your borrowing but any negative actions such as late payments, charged-off accounts or foreclosures.

Using your credit history and other information, the Fair Isaac Corporation calculates a credit score for you between 300 and 800 points. The median U.S. score is 720, with 760 or above being excellent, and 620 or below classifying you as a subprime borrower.

Anyone with a legitimate business relationship with you can see your credit rating.

General Effects of Financial Hardship

Financial hardship comes in many forms. Job loss can leave you unable to pay your bills. If you have adjustable rate debt and the interest rate rises, your debt-to-income ratio can suddenly become out of balance. So while your income is unchanged, you are now struggling to meet your obligations. Prices can increase in inflationary times. Unexpected illness or accident can bring unexpected bills.

The source of financial hardship can vary, but the general effects are the same: You are unable to comfortably meet your obligations and are in need of cutting back, in danger of being late on bills or both.

Your Credit History

The first impact of financial hardship on your credit rating will be negative actions recorded on your credit history. If financial hardship leads you to juggling payments and you pay late on a credit card or loan, that information goes on your credit history. If a loan is consistently paid late and turned over to a collection agency, that also goes on your history. If an account is closed or charged off, it goes on your history. So late payments on one loan can have multiple negative effects on your credit history.

Your Credit Score

Every negative impact on your credit history created by financial hardship also impacts your credit score. As an example, if you default on a home loan and the mortgage company forecloses on your home, it can lower your credit score from between 130 and 230 points. 

To a lesser extent, any negative action that goes on your credit history also impacts your credit score.

If these actions are driven by financial hardship that is out of your control, you may be able to negotiate with the lender to change the loan terms or grant you some leeway, but the late payments or defaults will still impact your credit history and score.

Future Borrowing

Financial hardship today can impact your credit rating for years to come, even if you overcome the hardship and again are in a sound financial position. Negative information stays on your credit rating for three years. A foreclosure stays there for seven years and a bankruptcy 10 years.


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