Promise to Pay

​Lingering bad debt can equate to years of financial upheaval

By Sarah Hallier.

Most borrowers, whether they are first time newbies or experienced investors, understand that your credit rating is quite possibly the single most important factor in determining your credit worthiness. With the ever-changing world of home loan regulation, the credit rating is the one constant that rarely changes. Your credit score determines your eligibility and notifies the lender of one important factor – is your promise to pay them back worth anything?

So let’s break it down. With every credit score comes a credit history. For most individuals, it isn’t one factor that makes or breaks it for them, but instead, a series of layers that slowly erode that good credit rating in which we all strive. However, this isn’t always the case. Certain situations allow creditors to attach liens to your name, your home, your business or income, and, of course, the dreaded credit report. Here’s how it works:

The single leading issue with “bad credit” comes in the form of not paying your bills on time. So, if your Chase Visa wasn’t paid by the due date, Visa can send the three trade lines (usually Experian, Trans-Union and Equifax) notice that you haven’t paid them. The three bureaus, which these three credit reporting companies are usually referred, then have a certain amount of time in which they can list your late payment on your credit report. Unless disputed, these late payments are left on your credit report between seven and ten years, and the resulting negative fallout can be devastating for your financial future. If too many “lates” occur, your score will begin to rapidly drop. If they drop too low, you will no longer be able to incur any attractive car or home loans, nor any credit cards. You won’t be able to refinance existing loans, either, so you can kiss all that equity in your current home goodbye.

One degree worse than the “late payment” model of negative credit history is the collection or judgement. A collection happens when you don’t pay a bill, and the lender proceeds by sending the debt to a collection agency, which then reports it negatively on your credit report. Most collection accounts prohibit you from attaining future loans until proof that they have been paid is given to the credit reporting agency, and they legally remove it from your report or give you proof in writing that is has been paid.

An even more challenging type of this bad debt occurs in the form of a judgement. A judgement can happen for many reasons. The most popular are mechanics liens (you didn’t pay the fence guy when he built your new fence), or someone sued you and you didn’t pay them. These are VERY BAD for your credit, as two very prohibitive challenges occur.

First, your credit score will plummet. Judgements show the credit bureaus that you don’t pay your debts, so this is a serious factor when determining your credit worthiness. Secondly, a blanket judgement can be attached to your home, your income/business, your personal name, and any other sources of income that you may have. What does this equate to? Besides a ruined credit score, you may also be unable to secure any type of financing, including a home or car loan, nor any type of credit cards. Lastly, if you own a home, you will not be able to refinance the current loan, nor SELL the home.  A lien will be placed on the home and will show up in many different areas, including the actual credit report, as well as the Preliminary Title Report.

Bottom line? Pay your debts. If you owe something, pay it. And pay it on time. The ramifications can last much longer than you may anticipate, and the headache and extra costs associated with it may not be worth it in the end.