You might have considered getting a home equity or some other consolidation loan to save you from delinquent accounts that are racking up late fees. You put your hopes and trust in a financial institution that advertises exactly that service. Yet, they denied your loan application after pulling your credit report, and for good reason. The code “amount owed on delinquent accounts” is more detrimental to your credit scores than anything else.
|“Amount Owed on Accounts is Too High”||Credit Score Risk Factor Codes|
This is the credit killer. This code is most responsible for the huge drop in credit scores when people are falling behind on payments. The reason is that it is a factor in two of the main components of credit scoring.
Your payment history comprises 35% of the importance of credit scoring formulas. Any delinquent payment causes an immediate plunge in credit scores. A substantial portion of credit history is focused on the most recent time period, since your current situation is far more telling of your credit situation than your payment history from 6 or 7 years ago.
How much you owe carries and additional 30% of credit scoring weight. The more you owe, the more likely you might have difficulty in repaying your debt. Some accounts like mortgages are supposed to have higher balances. Other accounts, and especially credit card accounts, are not supposed to have high balances.
When you are told that the amount you owe on delinquent accounts is too high, then you are getting hit twice. It is not just this reason code that may be lowering your score. Chances are, you are also getting punished by several score reasons that are further reducing your credit scores to subprime levels.
You might argue that you would be better off if they approved the consolidation loan. After all, you would no longer be late and free from late fees. The problem though is lenders understand that most debtors that use loans to consolidate credit card bills end up in even higher debt situations in less than 2 years. Two independent studies concluded almost the exact result after tracking this trend. Of homeowners that took out home equity loans to repay credit card debt, 70% had even higher amounts of credit card balances just 2 years later. Lenders know that if you are already having trouble now, there is almost no chance that you would be able to repay twice that amount later on.
If your consolidation loan or home equity application was denied because you still owed money on delinquent accounts, you need to understand that your financial situation is in a state of emergency. Unless you take immediate and proper action, you will experience collection attempts, legal action and/or bankruptcy.
Note: Amount owed on delinquent accounts is credit bureau risk score reason 34 with Equifax and Experian consumer scoring products, and reason 31 with TransUnion. For NextGen scores, it is code A6.
Long is a graduate of the University of North Carolina at Chapel Hill with a B.A. in Industrial Relations. He subsequently received his Certificate in Nonprofit Management from Duke University. His Certificate in Financial Planning was issued by Florida State University.
Long has achieved the Accredited Credit Counselor and Accredited Financial Counselor certifications through the Association for Financial Counseling, Planning and Education. Long originally achieved the Certified Credit Counselor designation through the National Institute for Financial Education.
In addition to years of nonprofit leadership, Long has been an innovator in the field of volunteer tax return preparation programs. He assists volunteer associations and nonprofit organizations who seek to integrate credit counseling and asset-building programs with free personal income tax preparation. His approach to using free credit reports as both an incentive and a screening tool for placement into asset-building programs has been shared with members of the National Community Tax Coalition, the EITC-Carolinas Initiative of MDC, Inc. and nonprofit groups across the Carolinas.
Long assists members of our armed forces in the Carolinas, Iowa, Rhode Island, Georgia and Germany with financial readiness. Please support our Soldiers, Marines, Airmen and Sailors!
"The democracy will cease to exist when you take away from those who are willing to work and give to those who would not."