Bad debts that appear on your credit report damage your credit score and hurt your chances of obtaining new credit at a reasonable interest rate. The consumer credit reporting agencies, however, do not solicit these records from your creditors. Rather, the creditors report your payment history--or lack of payment--to the credit bureaus via credit reporting software. Only certain types of businesses make regular reports to the credit bureaus.
Credit Card Companies
When you apply for and receive a credit card, the credit card provider updates your credit file to reflect your new card and its balance. As you make purchases and payments, the credit card company reports your activity to the consumer credit reporting agencies via regular updates. Thus, if you miss payments or default on your credit card repayment obligation, the company will note this fact on your credit profile--damaging your good credit rating.
Mortgage Companies
Like credit card companies, mortgage companies report your payments on your home loan to the consumer credit reporting agencies. Once you begin missing mortgage payments, the missed payment notations on your credit report lower your credit score--making you a more significant risk for future lenders. While all missed payments remain within your credit file for seven years, the negative impact of previous late payments lessens over time and, provided you rehabilitate your bad debt, your credit score will recover.
Should you stop making payments altogether, however, your mortgage company will foreclose on your home. A foreclosure record results in far greater damage to your credit than a missed payment or two. The damage you suffer will vary depending on the information already present within your report. Like missed payments, foreclosures remain on your credit report for seven years.
Collection Agencies
Unlike credit card and home loan accounts, which can reflect positive as well as negative information, collection accounts reported to the consumer credit reporting agencies by debt collectors are always negative. Collection agencies purchase bad debts from credit card companies, hospitals, utility companies, cell phone providers and other creditors.
Fortunately, not all bad debts that result in collection accounts cause an immediate drop in your credit rating. The FICO '08 scoring system, which went live in 2009, ignores collection accounts for bad debts less than $100.
Court Records
Various court records note your inability or refusal to pay off bad debts. Civil judgments, bankruptcies and tax liens are just a few examples of public records held by the courts that ultimately show up on your credit report.
The courts are an exception to the credit reporting rule. Unlike creditors, the courts do not report debts directly to the consumer credit reporting agencies. The courts report new public records to the Public Access to Court Electronic Records (PACER) database. Representatives for each reporting agency then pull any court records related to your bad debt from PACER and apply the records to your credit report.
