How Bad Credit Happens & What You Can Do About It

Bad credit can keep you from renting or buying a home or getting a loan that you need, but bad credit isn't permanent. Learn how to fix it.
A young woman works on her credit and pays her bills while sitting at a table and looking at her laptop
Written by:
Chris Kissell
Edited by:
Kristin Marino verified

Bad credit can sneak up on you slowly. Perhaps you miss a few bills or run up large debts on your credit cards. At first, you might not notice the damage these mistakes are causing to your credit.

But eventually, bad credit will make its presence felt. And when it does, it can create stress in your financial life.

How does your credit go bad? And what can you do about the problem after it arises? Read on to learn more.

What’s on a Credit Report?

A credit report contains information about your history of borrowing and your track record of making payments on those obligations. For example, if you have an auto loan or credit card account, that information will appear in your report, along with a history of how well you have kept up payments.

When you borrow, lenders, credit card companies, and others report information about your history as a borrower to credit-reporting agencies. These agencies — the biggest are Equifax, Experian, and TransUnion — collect and store this information, which finds its way into your credit report.

You should learn how to check your credit report, stay on top of it, and check it frequently.

There are multiple companies that develop credit scores, said Gregory Germain, a professor of law at Syracuse University, College of Law. The most “famous” of these is the Fair Isaac Company, which issues its FICO scores, but there are other companies that issue credit scores, too.

“They all have proprietary statistical systems to determine credit scores and they keep their methodology secret,” he said.

A typical credit report might include personal information about you, such as your:

  • Name
  • Current and former addresses
  • Date of birth
  • Social Security number
  • Phone number

In addition, the report will include information about both your current credit accounts and some from the past. Information may include:

  • The credit limit or amount
  • The current account balance
  • Your history of making payments on the account
  • Notes about any items in collection

Certain types of public records also might appear in your credit report, including liens, foreclosures, bankruptcies, and civil lawsuits and judgments.

“Bankruptcy has a significant effect on your credit,” Germain said. “First, a Chapter 7 bankruptcy will be reported on your credit report for 10 years from filing, and a Chapter 13 bankruptcy will be reported for seven years from filing. It will also have a serious effect on your credit score, especially if you had a high credit score before filing.”

Individuals who file bankruptcy, but previously had a high credit score, could see their credit score drop by hundreds of points. People with bad credit could see a much smaller drop, he said.

“But creditors will see both the low score and the bankruptcy notation on your report when considering whether to grant you new credit. “Also, your credit cards will generally be closed after bankruptcy if you discharge any unpaid balance, and they may be closed at the creditor’s election even if you did not discharge any balance.”

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What Makes Your Credit Score Go Up or Down?

Your credit report will note whether you have made your payments on time and will include information about other negative or positive behaviors you have engaged in as a borrower. This information plays a large role in your credit score.

Some of the things that can appear on your credit report and hurt your score include:

“Most information will remain on your credit report for seven years (10 years for a Chapter 7 bankruptcy), so negative information will be there and be reflected on your report and in your credit score for a long time,” Germain said. “But the older the information, the less it will impact your statistical score.”

There are several things you can do to boost your credit score. These positive behaviors include:

One way to maintain a good credit score is to spend less than you make, which means living within your means.

“Begin to save and build wealth and have an emergency cushion,” Germain said. “[Next,] apply for and use credit wisely. Shop around for low fees and maximum benefits and know what using your credit will cost. Do not buy things unless you can afford to pay for them, (generally with the exception of a house and possibly a car), you should pay for them in full at the end of the month to avoid interest charges.”

How Do Bad Things on Your Report Affect You?

When bad information appears in your credit report, it sends your credit score lower. This has a real-world impact on you in many ways.

The information on your credit report determines the credit score that is assigned to you. Negative information in your credit report or a low credit score can have a major impact on your ability to live out your day-to-day financial life.

For example, if you have a poor credit score, you may be unable to qualify for loans or credit cards. Even if you are fortunate enough to qualify, you will pay the highest rates.

Information on your credit report can also impact you in unexpected ways. If you grant permission, potential employers will be able to check your credit report when you apply for a job. Negative information on your report could sink your job prospects.

In addition, landlords may look at your credit report when determining whether to rent an apartment to you.

In short, the ramifications of a poor credit history can spread far and wide throughout various areas of your life.

“The only thing you can do as a consumer is avoid negative information on your credit report by carefully managing your debts and payments,” Germain said. “What happened in the past, if accurate, cannot be changed.”

What to Do If Your Credit Score Is Going Down

When we least expect it, life can throw us a curve that puts our finances in jeopardy. A sudden job loss, unexpected illness, or another event can make it more difficult to pay bills.

If you are suddenly unable to pay your debt obligations, your credit score likely will suffer. However, ignoring the problem will only make it worse. For example, your score will suffer if you fail to pay your bills within 30 days, but the damage only gets worse as that period stretches to 60 days and 90 days.

“As soon as it is reported by the creditor to the credit bureau it will affect your credit score, so generally it will show up within the monthly cycle,” Germain said.

So, take matters into your hands and try to fix your problem, one step at a time. Possible steps toward a solution — and eventual improvement in your credit report and credit score — can be made.

“Rebuilding credit is generally a slow process,” said Germain. “Start small with small limits, pay on time, and then seek increased limits and quality for additional credit. As creditors see you responsibly performing they are more willing to extend you new credit.”

Arranging a payment plan

Some lenders may be willing to work with you on crafting a schedule to pay back your debts. This can give you more “breathing room” to make your payments.

Meeting with a nonprofit credit counselor

These experts can help you craft a plan to attack and pay off your debts slowly over time.

Debt consolidation

This involves taking most or all of your debts from various sources and rolling them into one new loan with a single payment. This process does not eliminate your debt or the need to pay it off. But many people find it does make the process of paying off debts more manageable. Just be careful to make sure you are not paying more by consolidating your debts in this way.

Settling with debtors

Sometimes, your ability to pay off debts simply becomes too much to handle. Settling with your debtors for less than you owe can help you to gain back control over what seems like an unmanageable situation.

It is important to note that none of these options is likely to improve your credit score quickly. In fact, in many cases, following these options is more likely to cause additional harm to your score than to help it in the short term. In some cases — such as when you settle with debtors — the negative impact on your score can be significant.

However, one or more of the above solutions may help you to get a better handle on your debt and to begin making payments on time and in full. Over time, paying off your debts regularly and on schedule will lift your credit score and improve your credit report.

Find Lenders Offering Debt Consolidation Loans

Frequently Asked Questions (FAQs)

What are the pros and cons of debt consolidation loans?

The best consolidation loans may make paying your debts more manageable. Your scattered debts are consolidated down into one single payment. This can help you stay on top of your debts, possibly even making you less likely to miss payments.

But before you pursue this option, weigh the potential cons carefully. In some cases, a debt consolidation loan will carry an interest rate that is lower than the rates you were paying previously. This can save you money.

However, it’s just as likely that the rate will be higher, costing you money.

In addition, these loans may come with costly fees or may start with a low “teaser” interest rate that adjusts higher over time. And a debt consolidation loan does little good if you continue spending behaviors that only cause you to rack up additional debts.

It’s always a good idea to look before you leap with any loan. Banks, credit unions, and other organizations offer debt consolidation loans.

What should I do if I find an error on my credit report?

An error on your credit report can bring down your score. Unfortunately, such mistakes are more common than you might think, with the Federal Trade Commission finding that 1 in 5 borrowers have an error on at least one report.

If you find an error on your report, report the error to one of the three major credit-reporting agencies. Clearly identify the mistake, including the account number for the account containing the error. Ask for the mistake to be corrected.

The Consumer Financial Protection Bureau offers step-by-step instructions on how to report such an error. After the error is reported and corrected, your credit score should get a boost.

What are some overlooked ways to hurt your credit score?

Opening too many credit card accounts in a short period can injure your credit. Every time you open a new account, the lender is likely to do what is known as a “hard inquiry” on your account. Doing this too often is likely to hurt your credit score because it appears that you are desperate for credit — and likely in financial difficulty — even if that is not really the case.

Conversely, closing unused credit card accounts also can hurt your credit. By closing an account, you reduce the amount of credit to which you have access. This can have the unintended impact of raising your credit utilization ratio, which is the total amount of how much of your credit you are using compared to the amount available to you.

A higher credit utilization ratio can hurt your credit score. Keeping unused credit accounts open — even if you never or rarely use them — can help boost your credit score.