Your Credit Score and Negative Life Events
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Your Credit Score and Negative Life Events

Your credit score can rise or fall depending upon the impact of life events. Certain positive life events can raise or maintain your credit score and negative life events will drop that number it might leave your head in a spin. This article looks deeper into your credit score and the biggest negative life events that will impact it.

If you are like most people, you probably do not know your credit score. Those that know it have a hard time understanding that it is useful as a risk assessment tool, which is different from a credit report or a credit history. You need this understanding especially when negative life events are impacting your past, current or future life.

Credit and Your Credit Score

1) Credit is an arrangement that allows a buyer to take possession of materials or services immediately and pay later or on an installment program of smaller amounts over an extended period.

2) A credit history reveals your level of financial responsibility for paying loans, bills and obligations from yesterday to as long as ten years ago. Lenders evaluate a credit history when a potential borrower approaches with a request for the extension of money.

3) A credit report is the printed history of your credit responsibility. You are entitled to a copy of this report. It could run for pages depending upon your age, use of credit and types of credit instruments.

4) Your credit score is a number representing your financial responsibility. It is based on a risk factor scale that ranges from 350 to 900 with a highly desirable score being 720. It could be lower if there are some negative life events or rise higher if your handling of credit renders a pristine history.

Top Secret Calculation

When the Era of Plastic began, a means of measuring financial responsibility became necessary. As individuals were looking for cash - especially during economic downturns - the use of credit cards, installment loans and mortgage loans saw an increase in use. Lenders had the need to know more about borrowers before lending money. They also saw a need for this information to be in a central location and accessible only to those with a reason to use the information.

The emerging system - the FICO score - was a numerical scale representing various levels of consumer risk. In  early stages, the independent agency - Fair Isaac Corporation - took responsibility for establishing the algorithm that forms the basis of credit scoring. The scale was easy to read and apply, but it remains a top secret calculation to this day.

In 2007, FICO met the first challenge to its supremacy with the arrival of the VantageScore system. However, FICO retains its singular position because of the decision to utilize the best of the new scoring system. They did an update to the existing system and brought the best of both systems together.

Negative Life Events

Bankruptcy and foreclosure are the two biggest negative life events an individual could have on a credit history. Financially responsible individuals make every attempt to avoid either of these events. However, there are life events that come into play and make one or the other necessary. Unfortunately, both of these will show on a credit report for seven to ten years. Your credit score will drop 200 or more points with a bankruptcy or foreclosure on the record.

Chapter 7 and Chapter 13 are the two forms of bankruptcy that apply to a personal filing. Chapter 7 bankruptcy involves the liquidation of all assets that are not protected by law. It also allows for the discharge of debts in cases where assets are protected. There is no further source or likelihood of cash. Negative life events can happen to responsible people, too. Chapter 13 helps them to re-organize their lives, keep all property and forward regular payments to the court-appointed trustee who will dissolve debts over a period of three to five years.

Foreclosure As a Negative Life Event

Foreclosure is predominant with job loss, illness, death or a considerable drop in income. When property has an outstanding mortgage and becomes delinquent by two or more payments, the real estate goes into default, pre-foreclosure and foreclosure with an auction or short sale to follow. This parade of negative life events and eventual loss has the biggest impact on your credit score and remains part of your credit history for up to ten years.

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Comments (3)

I hate the credit system because all it takes is for something to happen than it takes forever to get your credit backand thats if you get lucky!

The credit scoring system does not take into account the economy, does it? Lose your job? Don't have the money for the credit card, food and mortgage, what is left to fall behind? Credit card first, mortgage second, food last. Credit scoring should figure out a way to not only measure credit, but also income for each person. After all, they must have the info, they are credit reporting agencies! GREAT article. You cleared some questions up.

Kathryn, credit scoring measures debt to income and is explained in your credit history report. This is why lenders place such a high value on your credit score. It also sheds light on the "risk/reward" system which is an analysis of the borrower's financial responsibility. That score is more than just a number. I'm working on a follow-up to this article that will touch on the income/expense and credit/debt ratios.

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