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When you borrow money for a major purchase, such as a home, lenders look at your credit score to determine your creditworthiness and the interest rate they will charge you. That's why it's so important to get your credit in great shape before you start shopping.
Here are some things you may have done that could have harmed your score:
Late payments. When you're 30 days or more late on a payment, it gets reported to the credit reporting agencies.
Collections. When you stop paying on a credit account, the creditor will send your account to a collection agency. This includes medical bills that might not have been paid by your insurance company. Remember, it's a patient's responsibility to make sure medical bills are paid. Collection agencies also report to credit reporting agencies.
Charge Offs. After a certain period of nonpayment, a creditor may charge off the debt as a loss on its books. This is a red flag to future lenders as it shows you don't pay your debts.
Settlements. Paying a portion of your debt is better than not paying anything. But any time you pay less than what is owed, you will damage your credit even if the creditor agreed to a lesser payment amount.
Bankruptcies/Tax Liens. A bankruptcy will show on your credit report for up to 10 years. Tax liens will hurt your credit even after you have paid them off.
Foreclosure/Short Sale. A foreclosure (including a deed-in-lieu of foreclosure) stays on your credit report for seven years. Your credit score could drop up to 150 points. If your score was more than 750, you could lose up to 200 points. A short sale will knock 75 to 100 points off your score. If you are responsible with your credit, you can qualify for a home loan again in five years after foreclosure and in two years after a short sale.
Always talk to a financial or legal adviser about financial questions.
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