How Does a Judgment Affect Your Credit Score?

Your credit is an important aspect of your financial profile when applying for a loan or even seeking to obtain employment. It's a good idea to learn what factors affect this score and how.

Identification

Your credit score is a three digit number. The score is generated by a numerical algorithm and is based upon the information contained in your credit report. A FICO credit score ranges from a low of 300 to a high of 800. The number is not static, but is ever-changing depending upon the changes that occur within your credit report.

Significance

According to FICO, 30 percent of your score reflects how well you pay your bills. A judgment occurs when a creditor takes you to court and receives a ruling against you for a specific sum of money. It indicates that you did not honor your financial obligations and is displayed on your credit report as a public record.

Effects

A judgment will drop your credit score once added to your credit file. The severity of the drop depends on the other information contained within your credit report. According to myFICO, judgments have a negative affect on your credit score and will remain on the report for seven years, whether you later pay it or not. The impact on your score lessens as time passes, however.

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Does a 401k Loan Show Up on a Credit Report?

You can get a guaranteed loan instantly by borrowing money from your 401k plan and even if you have trouble paying it back, the loan won't show up on your credit report. This type of loan, however, is usually a poor idea, especially if want to build good credit. Technically, a 401k loan is not a "loan," but borrowing from yourself.

Identification

A 401k loan does not affect your credit because it does not entail a credit check. You already own this money and the lender--your employer--automatically approves this. Alternatively, this means you cannot gain positive history on your credit report by paying this back on time.

Considerations

When you apply for a loan, the lender may inquire about any 401k loans. This could hinder your ability to gain credit because it increases your debt obligation and reduces assets. Lenders usually weigh your debt-to-income (DTI) ratio as heavily as your credit score, and having a DTI ratio of more than 35 percent will probably prevent you from getting a loan.

Effects

A 401k can indirectly impact your finances and reduce your ability to pay other loans with opportunity costs. When you pay back a 401k, you have to factor in taxes. If you borrow $300, for instance, and have a 28 percent tax rate, you would need to earn $416 to pay back that $300. Also, this diverts money away from an interest-bearing account, which dwindles your income during retirement.

Default

Even if you default, the 401k loan will not show up on your credit report. Defaults, however, incur a 10 percent penalty on top of your income tax rate. It can also shake your financial psychology. Ideally, retirement money should stay in an account and remain untouched until you retire and need it for an emergency, not everyday purchases.

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What Credit Score Is Needed to Buy a Home?

If you're in the market to buy a home, you're probably going to get a mortgage to pay the purchase price. When you approach a lender to get a mortgage, that lender will likely look at your credit score. This number represents how much risk you pose to the lender if it approves you for the loan, and the lower your score, the harder it is to get approval.

Credit Score

Creditors evaluate a borrower's creditworthiness based largely on the borrower's credit scores. Creditors use one score in particular, the FICO score, as the measuring stick to evaluate the borrower's risk of defaulting on the loan. FICO scores range from between 300 and 850. A high credit score means the borrower is of little risk on defaulting on the loan based on his past credit history, while a lower score represents an increased risk.

Preferred Score

Each mortgage lender develops its own guidelines for what it considers to be a good or bad credit score. However, many lenders consider a 720 FICO score as the division between good and excellent credit, according to LendingTree. Borrowers with a 720 FICO score or higher face the fewest problems obtaining a loan. They also get better interest rates on the mortgage, saving them money in the long term as they pay less in interest.

Lower Scores

Consumers with scores below 720 can still get a mortgage, but are less likely to get good mortgage terms. However, the lower you go, the less likely you are to get approval. LendingTree reports that creditors consider those with credit scores of 620 or higher as reliable borrowers, while those with scores lower than 620 are considered "sub-prime." Sub-prime borrowers face the most difficulty in obtaining a loan, but some lenders consider borrowers with scores as low as 500.

Other Considerations

Credit scores are not the only factor you need to consider when you're looking for a loan. If your score is good enough to meet the lender's lending criteria, you may still be refused a mortgage loan because of other factors. If you don't have a steady income, for example, you're not a good candidate for a loan. Also, according to LendingTree, many lenders prefer borrowers whose total monthly debt payments make up less than 36 percent of their gross monthly income, known as a debt-to-income ratio.

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Do Debt Collecting Agencies Affect Your Credit Score?

Original creditors have the recourse of turning over or selling unpaid credit account balances to debt collectors and debt buyers. These debt collecting agencies can affect your credit score in several different ways. Your credit score reflects the negative impact of debt collection activities in both the credit account listings and public information sections.

Credit Scores

Credit scores are calculated based on negative and positive information in your credit file. Credit reporting agencies compile the information through reports from collecting agencies, original creditors, debt buyers, public records and information that you provide to potential lenders. Each reporting agency calculates the scores slightly differently, but payment history is the largest single contributing factor in each calculation. Negative account entries, such as delinquencies, defaults and charge-offs, all affect payment history.

Collection Agencies/Debt Buyers

Accounts that are in default by more than six months with the original creditor are often turned over to a collection agency. The collection agency may be an in-house department of the original creditor or a third-party collector. If the third-party collector is unsuccessful in collecting the debt, the original creditor may choose to sell the outstanding balance to a debt buyer. Original creditors, third-party collection agencies and debt buyers can report defaulted debt to all three credit reporting agencies. Third-party collectors' and debt buyers' credit report account listings are additional listings to the original creditor's listing, which results in several negative entries against your credit score calculation for one account.

Negative Account Entries

Negative credit report entries by original creditors are often listed as delinquencies. Once the original creditor turns the account over to a collection agency, the negative entries can be listed as a default or a charge-off. Collecting agencies and debt buyers list the accounts collections, defaults or charge-offs. Negative account entries must be removed from your credit file seven years after the first delinquency with the original creditor.

Judgment

Another way that collecting agencies can affect your credit score is to file a lawsuit and win a judgment against you for the unpaid debt. Judgments are listed separately from account listings on a consumer's credit report. As part of the public record section of your credit file, judgments are included in the report for a minimum of seven years. If your state allows judgments to be renewed or to be valid for longer than seven years, they will remain on your credit report and negatively affect your score for as long as they are valid. In addition to the credit rating impact, judgments may allow collecting agencies to seize property, garnish wages and levy accounts to collect the debt. Judgment laws vary by state.

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The Best Way to Dispute Credit Errors

Your credit report is one of the most important documents in your life. It basically tells potential lenders, and creditors, whether or not you are a financially responsible person. Credit reports help determine what your cost will be to borrow money. Credit errors on your credit report can significantly impact your ability to purchase a car, or a house. Here's the best way to dispute credit errors on your credit report.

Get Organized

The most important aspect of disputing errors on your credit report is organization. You need to start this process by ordering credit reports from the three major credit bureaus. Experian, Equifax and Trans Union have their own separate credit scores. Moreover, information contained in an Experian credit report may differ from information found on your Trans Union credit report. Make sure to read every detail of each credit report. Use a highlighter or colored pen to mark credit errors, or discrepancies, in each report. Make a folder or binder in which you can keep your credit reports and any correspondence between you, your creditors and the credit bureaus.

Contact Credit Bureaus

After identifying errors, you can dispute them by fax, mail or online. Mailing your credit dispute letter is the best and most popular way to dispute credit errors on a report. Send it directly to the credit bureaus via certified mail. This will ensure that your letter has been received. When you write your letter, you can include supplemental documentation, such as a copy of your credit report. In your letter, be sure to clearly state what the error is and how it should be corrected. Include other pertinent information, such as account records and statements, to validate your case. Your credit dispute letter should be sent to each credit bureau that has an error, even if the error is repeated on more than one credit report. Writing a letter gives you the advantage of retaining copies of all your correspondence. Experian is the only credit bureau that requires you to dispute all credit errors online. Make sure to date the letter. And include all your contact information so that the credit bureau can properly respond to your dispute.

Follow Up

The credit bureaus conduct an investigation of your claim. They have 30 days from the time they receive your letter to respond to your dispute letter. You should be mailed a copy of any updates made to your credit report. If you have not received notification from the credit bureaus within 30 days, you can try contacting your creditor directly to resolve the error. If you don't get a credit error updated, you can resubmit your credit error dispute with new documentation to support your claim. When you have been notified that your credit error has been fixed, always double-check your credit report to make sure it's been updated to reflect the change.

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Tips & Tricks to Boost a Credit Score

Having a good credit score can save you money because you're eligible for lower interest rates on loans and credit cards. To boost your credit score, focus on payment history, amount owed, length of credit history and types of credit.

Credit Use

Pay down credit cards so the amount owed on each card is no more than 30 percent of the card's limit. Keep the ratio of debt to credit high by increasing credit limits when possible and keeping credit card accounts open even when they are not needed, especially long-standing accounts.

Automatic Payments

If a person with a credit score in the 700s misses a payment or makes a payment more than 30 days late, his credit score can drop by about 100 points, according to MSN Money. Build a spotless payment history by scheduling automatic payments for credit cards, student loans, auto loans, mortgages and any other lines of credit.

Credit Report

You can check your credit reports for free once a year through the official Annual Credit Report website. Check your free report at each of the three credit reporting bureaus for accuracy. Correct any errors that have a negative effect on your credit score, such as inaccurate reports of late payments.

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How to Remove a Chargeoff Off Your Credit Report for Free

A charge-off is a debt that is deemed uncollectable and written off by a creditor, such as a bank or credit card company. A charge-off will typically appear on your credit history for seven years. It may be possible to have a charge-off removed from your credit report by negotiating a settlement with the creditor. Some creditors will not remove the debt from your Experian, Equifax and TransUnion reports, although it turns into a positive if they agree to change the status to "paid as agreed" rather than "settled," writes Steve Bucci, a columnist for Bankrate.com. Other creditors will remove a settled charge-off entirely. You might be able to have a charge-off removed without paying it if you have legal grounds for disputing it with the credit bureaus.

Instructions

1

Order copies of your credit report from the three major credit bureaus -- Experian, Equifax and TransUnion. All three sell credit reports through their websites; however, you can get free a credit report once a year from the annualcreditreport.com website, advises the Federal Trade Commission (FTC).

2

Review the charge-off entry on each of the three credit reports. The information should be similar, but each credit bureau collects data and produces its own report, so there may be some differences. Look for some type of error on each report, such as a wrong date for the charge-off or an incorrect account balance. Note each of the inaccuracies that you find. There must be at least one error on the credit report to justify a dispute.

3

Search your financial records for anything that proves one or more of the charge-offs is erroneous. A charge-off is usually reported if you stop paying on a debt for six months, and it will appear in your credit history for seven years. You may not have proof if a charge-off involves an older debt, but written evidence makes it easier to get the item removed.

4

Compose letters to Experian, Equifax and TransUnion asking them to remove the charge-off from your credit file. Explain the mistakes in detail. According to the Divorcenet legal advice website, all errors that you dispute must be investigated by the credit bureaus as long as the request is not obviously frivolous. Include copies of any records supporting your position, if available.

5

Send the letters to the credit bureaus' mailing addresses given for disputes, which appear on their websites. Disputing a charge-off costs you nothing, and you can expect a response in about 45 days. Credit bureaus have 30 dates to investigate your claims, according to the FTC. You'll receive a letter from each credit bureau advising you of the action taken on your dispute, and you'll receive a updated copy of your credit report. If a credit bureau determines that your dispute is valid, the charge-off will be removed from your credit history.

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