The simple answer is yes, and it affects it big time. The better question would be, “How can different types of debt affect your credit score”. This article will discuss the same. Pay attention, this is a very important aspect of a credit report, score, and your finances in general.
Credit Related Debt
As a general rule, if you owe money to a professional entity i.e. bank, lender, credit cards, etc.) ANY default will be reported to credit bureaus. Of course some creditors will be slower than others, but this is the safest assumption. If you owe to a private entity in personal capacity i.e. family members and friends then the same would not get reported.
Immediate and Immutable
The fact that a consumer defaulted on a payment gets sent to credit bureaus. It doesn’t matter if you paid the next day. If you default, it gets reported; if it gets reported it, gets included in the computation.
Time When Change Is Reflected
At the latest, a reporting entity like a creditor will submit information once every 3 to 4 months. Some entities like credit card companies do it monthly, sometimes even sooner. Best case scenario, the negative information will be included in the report after 3 months. Worst case scenario is when everything lines up. This means the reporting, the score updating, and the inquiry, can be as soon as 3 days to 1 week.
Amount of Debt
Most credit bureaus base their scoring system on the Fair Isaac Corporation (FICO) scoring model. Of course, they modify things, but the broad strokes remain the same. This means that the total amount of debt reported to credit bureaus consist of 25% to 35% of a consumer’s credit score. The FICO scoring system rates it at 35%.
Type of Debt
Different debts get reported differently; for example, home amortization defaults, auto loan defaults, credit card defaults. There is no way to be sure, but these defaults are considered differently by credit bureaus. Why is there no way to be sure? This is because the exact formula of each credit bureau remains a closely guarded secret.
A consumer has a credit utilization limit. The most common example of this is the credit limit of a credit card. It bears stressing that credit card limits are based on studied financial capacity and propensity of the consumer. The higher a consumer utilizes this credit limit, the more negative points he/she collects. A good rule of thumb is to stay within 10% to 30% of the credit limit.
Length of Default
The longer the default, the more negative points a consumer picks up. Worst case scenario, it gets charged off. Charged off debts are reported and included in computing a credit score for 7 years. Aside from the obvious negative mark, the information itself is a red flag. Some entities consider the information included in the report, separately from the score. This means a consumer can have excellent credit, but if there is still a charge off information on the report, then lenders will be hesitant.