No matter how many positive accounts a borrower's credit file contains, lenders probably will focus on any potentially negative accounts. A negative account on a credit report means the borrower mishandled the account, such as refusing to pay back a debt. After a period of time, these accounts will disappear or become positive again.
Identification
Negative accounts are those that include a current or previous activity that suggests you are a credit risk. This may include public records, which reflect serious financial failings, such as judgments, foreclosures, suits, wage attachments, bankruptcies, liens and past-due child support. Negative accounts also include debts in collection, debt settlements and missed payments on accounts. Accounts that reflect and inability or refusal to repay a debt or honor a contract are the most serious negative accounts.
Effect
The effect of a negative account on a credit score depends on the seriousness of the offense and other items on your credit report. Judgments, collections and settled accounts can reduce your score significantly. A settled account, for example, takes up to 125 points off of a score of 780, according to Ellen Cannon of Bankrate. A single missed payment may be a cause of concern for a lender, but the credit scoring system usually forgives a single delinquent payment as long as it does not become a habit.
Reporting Time Frame
Most negative accounts are removed from a report or return to positive status after seven years. Tax liens remain on a report for seven years, and unpaid liens stay there indefinitely if the credit bureaus choose to report it forever. Bankruptcies remain on your credit report for up to 10 years, although it may be just seven years after finishing the repayment plan of a Chapter 13 bankruptcy.
Tip
Review your credit report for errors, and submit a dispute to the credit agencies if you discover any mistakes. Some common errors include a negative account that's being reported after the federal reporting time limit has expired and having a collection agency report a newer date on an old account that should have been erased -- called "re-aging" an account. Regardless of possible errors in the report, consumers should focus on building a positive history on a current accounts. Most lenders care most about the past two years of credit history, and negative accounts and items become less important in the FICO credit scoring system after two or three years, according to credit expert Lita Epstein in "The Complete Idiot's Guide to Improving Your Credit Score."
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