I'm Being Sued: How Will This Affect My Credit?

If getting sued doesn't cause enough to worry about, apart from the legal fees and time involved, you should be aware that a lawsuit may also impact your credit score. While not all lawsuits impact your score, they can significantly lower your credit score. If you need help with a lawsuit or understanding how the lawsuit might affect your credit, contact an attorney in your area for legal advice.

Credit Reports

The three companies that maintain consumer credit reports: Experian, TransUnion and Equifax, collect information from creditors about each individual lender. Whenever you engage in a transaction involving credit, such as taking out a credit card or applying for a lease, this information can wind up on your credit report. These companies use this information to create credit scores that represent how good or bad a consumer has handled credit in the past.

Lawsuits

A lawsuit is a civil legal action brought about when one person or organization, called a plaintiff, asks a court to award damages because it claims that another person, called a defendant, has caused the plaintiff injury or damages. Civil lawsuits range from small claims cases involving low-dollar amounts to massive class-action lawsuits involving thousands of people and billions of dollars. In general, only lawsuits that involve you and your creditors will impact your credit report.

Debt Lawsuits

The most common type of lawsuit that impacts your credit comes when a creditor sue you for an unpaid debt. If, for example, you fall behind on your mortgage payments and your lender forecloses on your home, this impacts your credit report because it involves your ability to pay your creditors. How much a lawsuit affects your credit score varies based on different factors such as the company calculating the score, but Yahoo Finance reports that if, for example, you have a foreclosure on your credit report, you could see your score lower by between 85 and 160 points.

Other Lawsuits

Even if you don't default on your loans and are not sued by your creditors, your credit score can still be affected by a civil lawsuit. If, for example, you get sued in small claims court by your landlord and your landlord wins, the landlord wins a judgment against you. The landlord then becomes a judgment creditor, and that judgment can get listed on your credit report and impact your credit score.

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Advantages & Disadvantages of Credit Scores

An individual's credit score is a three-digit number that attempts to compile all of the information about how that person has managed credit. Credit bureaus gather data about the person's credit accounts, money-related court records, credit applications and payment history. Gathering the data and converting it into a credit score can be advantageous or disadvantageous to the borrower in several areas.

Expedite Credit Decisions

Credit scores are advantageous for lenders who need to make credit decisions quickly. A lender likes to know as much as possible about how good of a borrower the applicant will be. A credit score encapsulates a lot of data in just one number so the lender can, at a glance, determine approximately how much of a risk the borrower is. It would take much longer for the lender to research the borrower's history directly with other lenders. This expedited process decreases the cost of borrowing and makes credit more widely available.

Determine Interest Rate

Lenders use potential borrowers' credit scores to determine what interest rates to charge. This can be either an advantage or a disadvantage, depending on whether the borrower's score is above or below average. People with good credit scores are rewarded for their good borrowing habits with a lower interest rate. On the other hand, people who have bad credit scores will pay for it as they have to pay a higher interest rate on all of the money they borrow.

Compile Long-Term Data

A credit score compiles information about all of the borrower's open accounts, plus positive information about accounts that have been closed for less than 10 years and all negative information from the past seven years. This can help or hurt an individual. It is advantageous for someone who has managed credit well over the long term because one mistake usually does not have a disastrous effect because so much positive information outweighs it. On the other hand, someone who has managed credit poorly and is trying to turn his financial condition around will have to spend a few years managing credit well before the score accurately reflects his new habits rather than the old ones.

Doesn't Reflect Unusual Situations

Many factors can affect a borrower's credit score, and in some cases, the credit score does not reflect a borrower's responsibility with credit. For example, if a couple is on the verge of a nasty divorce, one spouse might purposefully run up a joint credit card balance or fail to pay bills just to ruin the other person's credit. Or someone might have had to pay for expensive unexpected medical treatments that made it impossible to keep up with bills, even though the borrower would have been fine if the medical treatments had not been needed. Individuals can add a short explanation to their credit files, but lenders do not always consider such explanations.

Require Additonal Monitoring

Credit reports are not always accurate. Individuals often end up with accounts on their reports that do not belong to them or inaccurate reports of late payments. Although credit bureaus allow individuals to dispute information, the process is not instant and in some cases, the dispute does not turn out in the individual's favor. Keeping a credit report free of errors is just one more thing for individuals to worry about.

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How Can I Get My FICO Score?

Lenders use your FICO score to determine the risk involved in doing business with you, since this three-digit number (which generally ranges from 300 to 850) reflects your overall credit history. Credit card companies, banks, landlords and prospective employers may all view your FICO score when assessing your application for a credit line, apartment or job. Poor credit scores can mean being passed over for other candidates with a stronger credit history. Reviewing your FICO score is an effective way to identify incorrect information or accounts that must be repaid in full to regain points. You can get your FICO score through a number of avenues.

FICO Score

Your FICO score is composed of several factors. One component is your credit portfolio; lenders like to see a mixture of installment loans (such as student loans and home mortgages) and revolving credit (such as credit cards) but in general, installment loans are viewed more positively than revolving accounts. Your score also reflects length of history with lenders: Having longstanding relationships with lenders is viewed positively while recently opening numerous new credit card accounts reflects poorly. Other factors include your debt-to-income ratio and payment history.

Direct Purchase

The most direct way to get your FICO score is through purchase. Visit the myFICO.com website and prepare to enter credit card information to receive your score. After your payment is processed, you will be able to instantly view your credit score. Consumers have multiple FICO scores because of the varying ways credit information is reported to the three credit bureaus (Experian, TransUnion and Equifax), and it's possible to purchase more than one at a time. In 2011, consumers can purchase their FICO TransUnion and FICO Equifax scores for a total of $39.90, or $19.95 each.

Annual Credit Report

Another way to get your FICO credit score is to pay a fee to access the score when reviewing your annual credit report. Federal law requires the credit bureaus to furnish a free copy of a person's credit report each year, at consumer request. You may request the free annual credit report online within the official Annual Credit Report.com website, and then enter credit card information to receive your FICO score.

Credit Monitoring

Some financial services companies offer a free look at your FICO credit score if you sign up for a trial period of their product; for example, credit monitoring. This workaround helps you view your score for free, but if you forget to cancel the trial membership, you'll wind up paying monthly fees for the service.

Estimates

If you don't need a exact score, myFICO.com offers estimates for consumers willing to enter their financial information in response to questions such as how many credit cards you have, how much time has passed since you took out your first loan and the total balance of all of your loans, including auto loans, credit cards and home loans. The estimate won't be exact but can paint a general picture of what lenders may view when accessing your credit score.

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Credit Repair & Monitoring

Monitoring your credit history and keeping a close eye on your report is just as important as maintaining a good credit rating. Credit ratings factor into loan approvals and interest rates and the information on your personal report affects credit scoring. Anyone interested in a building a strong credit profile should review their file periodically and practice good financial habits.

Self Check-ups

Checking your own credit report is one way to monitor your report and improve your credit score. Because the information on your report plays a role in your score, watching your report carefully for signs of fraudulent activity or creditor mistakes helps keep your report in good shape. Annual Credit Report is the authorized online resource for free credit reports. Request a free report so you have access to all three of your reports from the three credit bureaus. You can order one free report yearly.

Credit Report Monitoring

Because Annual Credit Report only allows one free request a year, consider signing up for a credit report monitoring service that tracks your credit activity for as long as you're a member. Someone can get a hold of personal information and apply for credit in your name. With a monitoring service, you will receive e-mail notifications if someone submits a credit application using your name and Social Security number.

Payment History and Debts

Repairing your credit involves knowing what factors into your credit score and making improvements in these areas. According to Myfico.com, your payment record makes up 35 percent of your rating, whereas your debts make up another 30 percent of your rating. Improving these two factors can significantly increase your present credit rating. Start paying bills on time and devise a plan to bring down balances on credit cards.

Other Factors that Influence Credit

Payment history and the amount you owe aren't the only two factors in credit scoring. Factors such as length of credit history, types of credit and credit inquiries also influence your score. There's no easy fix for a short credit history (15 percent of credit score) and improving your credit in this area calls for keeping older accounts open and allowing time to pass. With regards to credit inquiries (10 percent of credit score), keep credit applications to a minimum. Don't apply for retail charge cards or loans unless necessary. For example, if you only have one type of credit, branching out and acquiring another type of credit can help your score because diversifying credit makes up 10 percent of your credit score.

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How to Apply for Credit Cards Without Hurting Your Credit Score

Applying for credit cards shouldn't hurt your credit score by more than just a few points--as long as you don't overdue it. Each time you apply for a card your credit will be checked by the card company, resulting in a credit inquiry. The fewer inquiries on your report the better, according to the website myFICO. Applying for multiple credit cards all at once, or even over the course of a year could significantly hurt your credit score as it creates a perception that you're loading up for a spending spree or taking on more credit than you can afford.

Instructions

1

Get a copy of your credit report. Reviewing your credit status will help you avoid applying for cards that you aren't qualified for. Order your credit report for free from the website Annual Credit Report (see Resources). View and print your report from the website or see instructions on the homepage to order by telephone or mail. The Annual Credit Report site was created by the three nationwide credit bureaus to offer free credit reports as required by the Fair Credit Reporting Act.

2

Order your credit score separately for a nominal fee by following instructions included with the report you receive through Annual Credit Report. You will be able to order your score directly from any of the three nationwide credit bureaus. Knowing your score is important as you seek to create as few credit inquiries as possible. For example, if your credit score is less than 620--generally the cutoff for "good" credit--you may be better off applying for department store or gas station cards than a full-featured bank credit card.

3

Compare credit cards by reviewing marketing materials from your bank or credit union, or online at credit card comparison websites (see Resources). Note any minimum qualifications, such as household income levels.

4

Apply for a single card. Wait several months--or longer--to apply for another. MyFICO says a single credit inquiry will hurt your score by less than five points. Thus, a drop in score of one or two points is really insignificant.

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Credit Reporting Time Limit

When you have negative items on your credit report, you may have problems opening new accounts and getting loans. Your bad credit might also keep you from getting insurance or a job. Not all items have such a severe impact. For example, too many inquiries by lenders can bring down your credit score, but not nearly as much as late payments, court judgments or bankruptcy. Fortunately, almost all negative items will drop off your report within a specified time limit.

Inquiries

When you apply for a credit card, loan or other credit account, most financial institutions will review your credit report. Their inquiries will show up on your report for two years from the date each inquiry occurred.

Late Payments

Late payments will remain on your credit report for seven years. According to Bad Credit Advisor, this period starts with the month in which the payment was originally due. If you pay late several times on the same account, each late payment will drop off your report in its individual time frame.

Collection Accounts

No matter when an account is purchased by a collection agency or given to the agency, it will still fall off your credit report in seven years from the original delinquency date. A credit agency cannot legally restart the clock just because the debt is now in its hands. Some may try, but you can file a dispute with the credit bureaus to have the information removed.

Charge-offs

Charge-offs are balances that the lender has deemed uncollectable. The time limit for reporting of charge-offs is seven years, starting on the original delinquency date plus 180 days. Even though a charge-off has been written off by the original lender, it may be sold to a collection agency. This will not automatically start the clock again.

Foreclosures, Suits and Judgments

When you lose your home to foreclosure, it will appear on your credit report for seven years. Lawsuits and judgments will normally stay on your credit report for seven years, too. However, if your state has a shorter statute of limitations, this information will be removed within that period rather than the full seven-year period.

Bankruptcy

A Chapter 7 bankruptcy remains on your credit report for 10 years from the date it was filed or the date of the bankruptcy decree. A Chapter 13 bankruptcy will drop off your credit report in seven years if you pay it as agreed. If you do not, it will stay on your record for 10 years.

Student Loans and Tax Liens

If you don't pay your federal student loan, it can stay on your credit report forever. If you pay it off, the time limit becomes seven years. Unpaid tax liens can also stay on your report indefinitely. If you pay your lien, it will be removed seven years after your payoff.

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How Do Settlements Reflect on a Credit Report?

Anyone facing a mountain of debt should seriously consider settling their debts. When you settle a debt, the amount you pay is substantially lower than the original balance. Some creditors will accept offers of 50 percent of the outstanding balance and in some cases the percentage can be 30 percent or 40 percent. The amount you can negotiate for depends on your relation with the creditor. The down side of debt settlement is that it adversely affects your credit report for some time.

Paid Settlement

When you settle a debt, your credit report will indicate that the account has been settled or it will say paid settlement. This information will serve to lower your credit score. The amount your score is lowered will vary from borrower to borrower. Derogatory information, such as this, remains on your credit file for seven years. When seven years has elapsed, the bad credit should drop off your file automatically, otherwise you can send a letter of dispute to the credit reporting agency.

Charge-Offs

Sometimes debts are charged off as bad debts before they are settled. When you settle a charged-off account, it can reflect as a paid charge-off or it could show up as a paid settlement. After you have settled your debts, other creditors will see that you had financial difficulty in the past and most likely they won't approve you for credit. When debts are charged off and settled, your credit score will decrease even more.

90 Day Account

Most creditors will not agree to settle your debts until they are 90 days past due. Any debts 90 days old at the time of settlement will not reduce your credit score significantly. The 90-day accounts have already decreased your score substantially. Establishing new credit after the settlement can significantly help your credit score. You must pay consistently on time to reap the benefits.

Written Agreement

When you are about to negotiate a debt settlement, keep in mind that your credit rating can be included as part of the negotiation. Let your creditors know that you would like to have the derogatory information removed from your credit file, upon payment, or have a favorable rating reported. Some creditors will agree to these terms and conditions and others will not. If you get a creditor to agree, make sure everything is in writing. Store your written settlement agreement with your other important papers.

Future Credit

In the future when you apply for credit, any creditors will most likely deny your credit request except those charging high interest rates and an excessive amount of fees. This is how they lower their risk of doing business with you. Once you are approved for a high interest rate credit card, continue to make timely payments and eventually you will be able to receive a credit card with favorable terms.

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