Credit deterioration occurs when an individual or business’s credit rating decreases due to late payments, loss of income, or other circumstances. Repairing the damage involves paying obligations on time and improving debt-to-income ratios.
Credit deterioration is any type of activity that leads to the reduction of the credit rating enjoyed by an individual or a business. There are many different events that can lead to bad credit. Some triggers for bad credit have to do with specific actions taken by the debtor, while others are due to circumstances beyond that debtor’s control. In either case, the result of credit deterioration is difficulty obtaining credit or borrowing money, due to diminished lenders’ confidence in the ability of the business or individual to repay the debt according to terms.
One of the most common reasons for credit deterioration is the debtor’s consistent late payment of debt obligations. The slow payment is usually reported to the credit bureaus, which then factor those late payments into the calculation of the debtor’s creditworthiness. Over time, failure to pay outstanding debts according to terms leads to FICO score reductions that can take years to recover.
A similar scenario involves situations where the debtor has the desire to meet its obligations, but suddenly lacks the necessary resources. Losing a job and the resulting loss of a steady stream of income will have an adverse effect on your ability to pay off car loans, mortgages, credit card balances, and any other type of debt. Since credit scores are based on both the ability to pay the debt on time and the amount of income generated by the debtor, losing a job can result in credit deterioration in two directions.
Sometimes credit deterioration occurs due to events beyond the control of the debtor. The death of a spouse and the resulting loss of income can cause financial hardship that damages the credit rating of the surviving spouse. Likewise, a prolonged illness that creates additional debt while limiting an individual’s ability to earn income would also increase the likelihood of default and make it more difficult for the debtor to obtain additional credit or financial assistance from lenders. Even if the credit rating is not damaged enough to prevent the borrower from borrowing money, the new lender is likely to charge a higher interest rate as a way to minimize the degree of risk they are assuming.
When any type of credit deterioration occurs, it is important to begin the process of repairing the damage as quickly as possible. Beginning to pay obligations on time will go a long way in reversing the downward trend in credit ratings. Securing a new job that comes with a salary similar to the previous source of income will also help stabilize and eventually refresh your credit score and FICO score. As more debt is retired and the debt-to-income ratio becomes more favorable, the credit rating will slowly begin to improve. While the process can take a lot of time and effort, the end result is usually worth it.
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