Spotting Red Flags on Credit Reports

Apr 2, 2020 9:35 PM ET

A red flag, in simple terms, is something that makes your credit report look ugly. For lenders, this might be something that warns them about the borrower’s ability to make payments.

There are many different red flags out there, but we can categorize them into two significant types:

Red flags that fall under the Red Flag Rule set up by the FTC in 2008
Anything the creditor sees as a warning or negative information about the borrower

In this article, we’ll look at the most common red flags that lenders and borrowers should avoid.

Erroneous Information

Credit agencies, from time to time, also commit mix-ups of names, addresses, and Social Security numbers. So, it’s also possible for your credit report to have information that doesn’t belong to you. And if you’re unlucky, the info might set off red flags.

Take the time to spot such errors and verify all entries with your SS number, employment data, and other personal information. Report any error you discover immediately to relevant people.

Identity Theft

Lenders will also try to see whether you’re taking care not to be a victim of identity theft.

Identity theft happens when another person steals your details and personal information, like your name, SS number, and birthdate. When the culprit has such information, he can easily open credit cards in your name, charge up the card, and leave the bill for you to pay.

Review your credit report regularly and take precautions to avoid identity theft.

Multiple Lines of Credit

This one is like a giveaway for lenders.

Although opening a single line of credit card account from time to time is normal, opening multiple credit lines in a short window of time is not. Such a practice can result in soaring interest rates as well as adverse credit profile if you fail to pay the debt.

There would be too many hard inquiries, which can further lower your credit score. At the same time, many lenders have a “cutoff,” meaning they limit the number of credit lines they want to see on your profile. If your credit lines exceed that amount, the lender will deny your application.

Maxing Cards, Paying the Minimum

The way you handle your credit cards also matters. Lenders care about your habit of paying the cards, so it’s not enough that you make payments.

If you run up a lot of debt and then pay only the bare minimum monthly, lenders can interpret this as a sign of carelessness or lack of discipline.

Cash Advances

Lenders also see using credit cards for cash advances as a red flag. The advance will be added to your debt right off the bat. And that immediately lowers your available credit, negatively affecting your credit utilization ratio, and your credit score suffers.

Also, credit card companies often have their credit scoring system. They regularly reevaluate your behavior by running your credit report through such systems. And most systems consider cash advances as risky.

As a result, your credit limit on your existing cards can be reduced. Worse, they may be canceled. And such reduction or cancellations sends a clear signal to other potential lenders: you’re a credit risk.

Account Sent to Collections

When you have an account that goes well beyond its due date, the creditor will usually sell the debt to a collections agency. Of course, this can only spell trouble for you and your credit report.

For one, this means the lender or creditor has given up trying to recover the debt from you. Your credit score will be lowered. Also, remember that that record will stay on your credit report for at least seven years from the delinquency date.

And remember that all this can happen even if you’re not aware of the debt. If you’re a victim of identity theft and you don’t know it, undoing the impact of this will still take time and effort.

Taking on Another Person’s Debt

When you co-sign another person’s loan, you become responsible for that debt. So, lenders will look at you as one.

And if that person neglects to pay the debt, you will also be affected. This means the loan will be included in your existing debt load when you apply for a mortgage, car loan, or others.

If the other person stops paying, the behavior will be on your credit report, too. Co-signing for a friend or a family member to help them is good, but be ready for the repercussions.

Foreclosure

Foreclosure refers to a series of legal proceedings started by the creditor to claim a property that is held as collateral for the mortgage that defaulted or is considered delinquent.

Foreclosures do not always appear as “foreclosures” on the report. They may be written as “breach,” “trustee sale,” “lis pendens,” sheriff’s sale,” “court sale,” “deed substitution of trustee,” and “notice of pendency.”

Bankruptcy

Bankruptcy is a process of letting people pay their debts with the protection of the federal bankruptcy court.

Although there are many variations of bankruptcy, Chapter 7 and Chapter 13 are the most common types that people encounter.

Of course, even if declaring bankruptcy will save you from some types of debts, you will still have some responsibilities. And it’s a huge red flag on your credit report.

Chapter 7 Bankruptcy

This type of bankruptcy is what most people associate with the phrase “going bankrupt.” Unsecured debts are not repaid, but secured debts will not be dismissed or discharged until the court decides so.

This version of bankruptcy stays on your credit report for ten years.

Chapter 13 Bankruptcy

Chapter 13 is a “reorganization” type of bankruptcy for those who want to repay their creditors but cannot afford full payments.

This type of bankruptcy requires you to submit a plan for the repayment of debts over three to five years.

If you have a steady stream of income, Chapter 13 is a better alternative than Chapter 7. But it stays on your credit report for seven years.

Conclusion

It’s true: keeping an excellent credit report is difficult, and you’ve got to make sure you minimize the number of red flags there. And the best way to do that still remains to keep your debt within your capability, and always checking that all the information is accurate and correct.

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