You get bad credit by having more negative information on your credit reports than positive information. This usually happens as a result of numerous late payments on credit cards, loans and other bills, which may escalate to charge-offs, collection accounts, bankruptcy and other bad outcomes. While the circumstances surrounding bad credit vary, most cases can be traced back to payment issues and poor credit management.
Bad Credit Through Payment Issues
Payment problems are at the core of many major causes of bad credit scores, including bankruptcy, foreclosure, repossession, and charge offs/collections. The inability to make payments on your home, car, or credit accounts sets all of these events in motion. Considering that payment history accounts for 35% to 40% of your credit score (depending on the model used), it should be no surprise that missing payments can cause tremendous credit score damage, leading to bad credit.
Bad Credit Through Poor Credit Management
Poor credit management can also lead to bad credit. Mismanaging your credit can manifest itself in a number of ways, including high credit utilization, a poor credit mix, and multiple credit inquiries in a short period of time. Your credit score reflects the risk you pose as a borrower, so it makes sense that racking up a lot of debt, applying for credit often, and having a limited number of credit accounts could contribute to bad credit.
Now that we’ve explained the two main ways to get bad credit, let’s drill down into the specifics. Some of the biggest contributors to bad credit are listed below.
9 Causes of Bad Credit
1. Late Payments
Since payment history accounts for between 35% and 40% of your credit score, late payments can cause your credit score to drop in a hurry. Generally, the further past-due your payment gets, the more damage your credit score will suffer. Plus, the higher your credit score is to start, the more of a point dip you’ll take once the late payment is reflected on your credit report.
2. Charge Offs/Collections
After multiple missed payments on an account, the account will reach charge-off status (usually around the 180-day past-due mark). At this point, many creditors turn accounts over to collection agencies in an attempt to collect your debt. On top of the multiple missed payments leading up to it, the reflection of your account in charge-off and/or collection status on your credit report can also cause your score to drop by as much as 100 points or more.
Similar to the charge off process with credit cards, a loan in default indicates an inability to pay, which leads to a dip in credit score.
Not only does the path to bankruptcy cause credit damage (i.e. late payments and accounts in collections), but the reflection of bankruptcy on your credit report will also cause your credit score to plummet. Depending on the state of your credit score before bankruptcy, you could see a credit score drop between 150 and 240 points.
Foreclosure, like bankruptcy, starts with a series of missed payments. When combined with the reflection of the foreclosure on your credit report, you’re in for major credit score damage.
6. High Credit Utilization
Even if you stay on top of your payments, too much debt compared to your credit limits can contribute to a decreased credit score. Credit utilization is a major contributor to the amounts owed portion of your credit score, which is worth about 30%. If it looks like you’re in danger of maxing out your credit, your score is going to take a hit.
7. Closing Credit Cards
When you finish paying off a credit card, it seems like the logical step would be to close it. While there’s nothing to prevent you from doing so, this practice should really be avoided. Closing a credit card will decrease your available credit as well as the length of your credit history (worth about 15% of your overall credit score). So, closing a credit card could contribute to bad credit.
8. Multiple Credit Inquiries
A single credit inquiry will not affect your credit score much, but multiple inquiries within a short timeframe can be interpreted by lenders as a cry for help. Not to mention, new accounts and inquiries contribute to 5% to 10% of your overall score. So, if you want to avoid a drop in credit score, it’s best to limit your applications for new credit.
9. Poor Credit Mix
If you don’t have a lot of variety in your credit portfolio, it becomes much easier to get bad credit. For example, if you only have one credit card and you miss a payment, there’s nothing else in your credit report to balance out this negative impact. To avoid potential credit score damage, try to have at least a few different types of credit accounts in good standing in your portfolio, but don’t force it by borrowing when you don’t need to.
How to Recover From Bad Credit
Negative information will hurt your credit score for the 7-10 years it remains on your credit report, but the impact gradually begins to fade before then. And you can speed up the recovery by regularly adding new positive information. The best way to do that is by opening a secured credit card account. You will have to place a refundable security deposit, the amount of which will become your spending limit. But all major secured cards report to the credit bureaus each month. So if you pay your bill on time every month, or just maintain zero balance, your score will improve.
For more information, check your free personalized credit analysis from WalletHub. We’ll grade every part of your credit to pinpoint any problem areas and tell you exactly how to fix them.