Bad Credit Causes

We often hear the phrase “bad credit” thrown around in the finance industry. What does the term mean? Bad credit refers to someone having a low credit score. A credit score is a value assigned to a person on their ability to fulfill financial commitments.

A variety of factors can cause low credit scores. Individuals can make informed decisions by being aware of causes like unemployment, identity theft, and debt. Individuals should build positive financial habits, as a bad credit score is difficult to bounce back.

For those that are unaware, credit scores are looked at when you need financing. This includes mortgages, credit cards, and loans. The lower your credit score, it will be challenging to get these financing options.

This article aims to teach readers about the main causes of poor credit. Hopefully, readers can use this insight to avoid doing certain practices. 

Bad Credit Cause 1: Unemployment

Unemployment can significantly impact a person's creditworthiness, making it one of the primary causes of bad credit. Credit takes a hit during this period as individuals have no income stream. Thus, they cannot meet certain obligations. 

This inability to pay off loans and debts leads to decreased creditworthiness, and lenders are hesitant to provide loans or credit.

The burden caused by unemployment can decrease a person’s credit score. Negative payment history and the inability to meet financial obligations make it challenging to obtain loans in the future, especially for significant purchases like a house or car.

Let’s discuss a situation similar to unemployment  – underemployment. 

The first telltale sign of slipping credit is when an individual cannot pay regular expenses. These regular expenses include groceries and gas. This would eventually accumulate debt, and credit scores would decrease.

Unemployment can make paying obligations very difficult. This can lead to making late payments. As a result, credit scores can decrease.

Some tips for dealing with unemployment are:

1. Speak with creditors, financial counselors, or credit counseling agencies

These are professionals who will work with you to make a payment plan. Seek assistance from these parties as they can provide the appropriate guidance.

2. Find income sources

Although a full-time job may be hard to find in this economy, there are other ways for individuals to make money. Look for part-time jobs or freelance work. Even if you make a small amount of money, it will still make a difference.

3. Build an emergency fund

As with other contingencies, saving a portion of your income is important. This will potentially offset the financial burden caused by a change in job status. An emergency fund will also reduce the dependence on credit in tough times.

Unemployment causes serious financial strain, but thankfully, there are ways to mitigate its effects.

Bad Credit Cause 2: Debt

Bad credit can almost always be linked to debt levels. Credit levels often plummet when the debt goes beyond a certain level of what the individual can afford. Today, credit cards have become a common reliance for many individuals. They usually carry balances, which is a bad habit. 

As credit card debt accumulates, interest rates would increase as well. Over time, it would be harder to keep up with payments, and credit scores would decrease.

In regards to debt, it is important to cover student loan debt. Student loan debt affects more than 300,000 people yearly. Students often have limited financial understanding compared to adults and may take out loans with unfavorable interest rates, making it more challenging to repay the loans.

That is why so many students end up with poor credit scores. They do not manage their loans. Any delinquencies done at a young age tend to affect you for future loans.

Nowadays, we hear of the federal government’s plan for student loan forgiveness. This occurs because the outstanding loan amount is too large for students to pay off, resulting from insufficient finances.

Ways to Manage Significant Debt

There are a few ways to manage significant debt. These include:

1. Making a plan

Within a few hours, you can make a plan to pay off your debts. Pay off the higher-interest ones first. You can also use the services of financial counselors or credit counseling agencies.

2. Budgeting

A recurring theme for credit is to understand where you are spending money. Do you need to purchase all those items? Allocate more of your money towards paying off debts.

3. Negotiate

Many people are unaware that negotiating with creditors is a viable option. Explain your situation and ask if they can either reduce interest rates or consolidate your higher-interest debts into a few payments.

4. Be smart

The last way to manage debt is to ensure you never remain in this position again. Make payments on time. 

Debt is a chief cause of bad credit. Don’t fall prey to taking out loans you cannot pay off. Take proactive measures such as planning out your repayment plan. This is a responsible habit for borrowing.

Bad Credit Cause 3: Missed or Late Payments

Under the debt category, there is a subcategory about payments not being made on time. This can quickly lower credit scores.

If someone has a history of not making payments by their due date, their record will instantly be flagged. Financial institutions and banks view individuals with such a track record as having high credit risks and are more hesitant to lend them money. This demonstrates low creditworthiness.

Some ways to prevent missed or late payments are:

1. Use reminders

Take advantage of the clock app on your phone or other reminder tools to schedule alerts for payment due dates. These reminders can help you stay on track and avoid forgetting payment obligations.

2. Budget

Allocate the right amount of funds for payments. Do not overstate your money, as that would lead to taking out a loan you cannot afford.

3. Set up an emergency fund

As said before, emergency funds are great ways to keep some money aside for these obligations. This can buffer any potential income disruptions. 

4. Automatic payments

Nowadays, everything can be done online. Creditors have features to set up automatic payments. This guarantees that the amount will be sent to the according recipient by the deadline. Just make sure you have enough funds.

These practices can help individuals avoid making errors when paying.

Bad Credit Cause 4: Identity Theft

Identity theft drastically worsens credit scores. Not only is it a crime, but identity theft permanently stays on record and ruins a person’s chances at building credit. Examples of identity theft include stealing checks, using someone else’s credit card, and opening fraudulent accounts.

Broadly speaking, accessing someone else’s personal information is a crime. These include a person’s bank account details, social security information, and credit card information.

This can lead to bad credit. Let’s look at it from 2 perspectives.

1. Victim's perspective

If you are the victim, the perpetrator may make many purchases, apply for loans, or open bank accounts using your information. These are unlawful since consent was not given.

The perpetrator may increase debts for the victim. Therefore, the victim’s credit score would plummet since they are not aware of the loans and debts caused by the offender. They will have a hard time accessing credit. This results in a painstaking process of rectifying the fraud.

2. Perpetrator's perspective

When a perpetrator uses someone else's information to make purchases, their actions are flagged once they are caught for their crimes. Their credit score would drop significantly, making taking out a loan and receiving money almost impossible.

Ways to Prevent Identity Theft

Some ways to prevent identity theft are:

1. Be protective of personal information

Don’t give out information unless necessary. Avoid sharing information through pictures or online. Set up unique passwords, making accounts harder to access.

2. View credit reports

Make sure you take a good look at your credit reports. If there is anything ‘off,’ contact the credit company. It's better to be proactive and address potential issues promptly.

3. Look for signs of identity theft

Identity theft is a common offense in the United States. Make sure you check for any unauthorized transactions. Report anything that you did not do to the respective financial institutions.

If anything looks like fraudulent behavior, place credit freezes. These will prevent any further actions from your accounts and credit cards. Take the right measures. 

A common theme of this article is that decreases in credit scores do not go away from records right away. They linger for at least a few years. It would be hard to obtain mortgages or loans.

Credit scores affect work life as well. Job employers conduct background checks. These routine checks also examine credit scores. A very low credit score may disrupt job offers.

Building credit after serious offenses like identity theft will take many years. Remember that one must undergo talks with bureaus, police departments, and other financial institutions. Overall, the effects of identity theft are very serious, and it’s best to be responsible.

Bad Credit Cause 5: Medical Events

Medical events are tricky concerning bad credit since some people deal with them more than others. Still, it is important to learn about them and understand what you can do to avoid negatively impacting your credit.

The cost of medicine and treatment at a medical institution can be a large burden for some individuals. Insurance coverage plans may not cover these costs.

Lack of insurance coverage may worsen creditworthiness. As insurance coverage decreases, the individual’s responsibility to pay the expenses increases. Medical expenses are pricey and tend to pile on. As a result, this may result in delinquencies.

When people cannot pay, they use loans. Then again, these loans worsen credit scores if not paid off properly.

Ways to Navigate Medical Events

Here are some ways to navigate medical events:

1. Fully understand your insurance coverage

Take the time to understand what your insurance plan covers thoroughly. If you anticipate more medical events in the future, consider adjusting your insurance plan accordingly to ensure adequate coverage.

2. Utilize an emergency fund

These are great ways to set aside some money for contingencies. This will reduce the financial strain and reduce the dependence on credit.

3. Make payment arrangements

Medical events cause stress on families. It is important to take proactive steps to alleviate the financial aspect. Understand your insurance plan, use emergency funds, and make arrangements with healthcare workers regarding payment.

Do not let medical events decrease your credit score.

Conclusion

This article explored the main causes of bad credit. These causes include unemployment, debt, missed or late payments, identity theft, and medical events. These all contribute to reduced creditworthiness. It is important to stay on top of credit.

Credit makes many transactions possible. This is why you should always try to have good creditworthiness. Utilize all of the tips listed for each header. These will help mitigate the respective events. These are great ways to avoid a negative credit history or rebuild your credit score.

Don't hesitate to seek resources and support. Discuss your options with creditors, financial counselors, and credit counseling agencies. People are willing to help. You just have to ask. Pave a path to better credit by speaking with the people whose job it is to deal with this topic.

Avoid causes of bad credit, if possible. Build good habits.

These are some of the most helpful questions. Hopefully, that helps!

Researched and authored by Omkar Iyer | LinkedIn

Reviewed and edited by Parul Gupta | LinkedIn

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