It’s impossible to control many of life’s setbacks and disappointments — or the impact they could have on your credit score. By the same token, even some of the happiest moments in life can later wreak havoc on your credit score. In most cases, the life event itself is not to blame for the damage to a credit score — but the very change in circumstance often brings on certain conditions that can torpedo a formerly solid score. Regardless of which life event has precipitated your credit score drop, remember that you can reverse the damage with a healthy amount of awareness and persistence. Read on for our roundup of the five worst life events for your credit score.
The actual separation itself will not be reported on your credit score, and it will not cause you to be denied on any credit applications. However, many people find themselves struggling financially after a marriage dissolves. A divorced spouse may find it tough to make ends meet with a reduced income, leading to missed payments or higher credit card balances. Occasionally, if you hold an account jointly with an ex-spouse and your ex fails to pay, the negative entry could end up on the credit reports of both individuals. That is one reason why after a divorce, experts advise severing ties with the ex-spouse to avoid the possibility of any future joint account problems.
2. Job Loss
Your credit score can take a serious hit if you lose your job. Although your employment status is not specifically listed on your credit report — and will not factor in the overall calculation — you are likely to experience financial troubles during the period in which you are unemployed. Those monetary stresses, in turn, make job loss one of the worst life events for your credit score. Without a reliable income, you may resort to running up balances on your credit cards or attempting to take out a loan to cover your expenses. If money becomes particularly tight, you may not be able to make the monthly payments. Payment history and your credit-to-debt ratio will then be affected — two factors that account for a major percentage of your credit score.
Getting married is an undeniably joyous occasion — but most people are later surprised to find out that this life event can indirectly sink a credit score. When you merge your finances with someone else, for better or worse, you link yourself with their credit behavior. Merged accounts may be easier to track, but if one of you misses a payment, the other spouse will have that black mark recorded on their credit report for the next seven years, too. In addition, marrying someone with a weaker credit score can affect your ability to qualify for joint loans in the future, since lenders will consider both of your credit histories. That, in turn, could lead to loan denials or higher interest rates.
4. Opening a Business
Although the start of any new enterprise is an exciting time, entrepreneurs may notice an impact to the credit score along with some early financial growing pains. The typical new business owner will likely need to apply for personal loans to kick-start commercial growth. Whenever someone takes out numerous loans or opens credit cards within a short period of time, credit bureaus register these as hard inquiries that can dock credit scores a few points. Falling behind on these payments can seriously plummet a credit score. And since opening a business is often a risky economic move, many business owners may accrue sizeable debt on their own personal accounts if sales start slumping.
5. Identity Theft
Unfortunately, the phenomenon of identity theft has become all too prevalent — and its impact makes it one of the worst life events for your credit score. When thieves take your personal information and use it to incur high balances on your cards, or open accounts that they have no intention of paying, you could see your credit score drop by 100 points — or more. You may not even find out about unpaid collection accounts until you see them show up on your credit report months later. Although you can fight to undo the damage through disputes and credit repair, it can take years to fully restore your credit score to its former level.
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