Red Flags On Your Credit Report You Must Not Avoid
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For the majority of us, our credit report is not something we think of all the time, but it is the first thing that comes to mind when we think about applying for a loan to buy a home or a car or want to make our dreams come true and need credit.
A few obvious signs like foreclosure, bankruptcy, or late payments send clear signs to the banks and lenders about the risk of lending funds to you. But many more subtle signs might cause the application to be approved but at the most undesirable terms, or it can even cause the application to be rejected outright.
It helps to be aware of the negative signs or the red flags on the credit report. Once you are aware, you will take the necessary steps to fix them and improve the chances of getting a loan.
According to the Federal Trade Commission, you have the right to get a free copy of the credit report each year. You can get the report from the three credit bureaus. Take a good look at the report and if you notice any red flags, take immediate action.
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What is a red flag?
A red flag shows the possible existence of identity theft or an unusual pattern of account usage. It could be an invalid Social Security number, address discrepancy, or a credit card used to purchase a large number of electronics or jewelry.
What is the Red Flags rule?
The Red Flags rule will provide many examples of red flags in different categories as listed below:
- Suspicious identifying information or suspect documents.
- Alerts received from the credit reporting agencies.
- Suspicious account usage pattern.
- Notices from a victim of identity theft, customer, or law enforcement.
The red flags that apply to you will be based on the types of covered accounts and how they may be opened or accessed. It also depends on your experience with identity theft.
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Common red flags on credit reports
Too many new credit cards
Suppose you are somebody who regularly opens new credit cards whenever there is a chance, like get a 10% discount on your purchase or enjoy 0% APR for the first six months. In that case, you could be cutting off the financial options for the long term only to benefit in the short term.
Besides the fact that a lot of hard inquiries from applying for a new credit card can lower the credit score, several lenders also have a cutoff on the credit applications they would like to see before they approve you for any more. It could be as little as two applications in six months. Despite having a decent credit score, the application may be denied automatically, showing that you are taking on a lot of debt.
Inaccurate information
All credit bureaus tend to mix up addresses and names. They also mix up the Social Security numbers and put someone else’s information on your report. This will be common if you have a common name. This shows the importance of checking the credit report for errors. The wrong name or address on the credit report will reflect the wrong credit history and will not serve the purpose.
It is possible to uncover the error quickly. Whenever you get the credit report, you should verify all the entries, including your personal data. In case of name or address discrepancies, head to the website of the main credit reporting agencies- TransUnion, Equifax, and Experian and report about the error. You will have to inform all the three agencies about this error to have it rectified.
Bare minimum payments
Lenders will not just look at the number of credit cards you own but also take a deep look at how you manage them. If you run up a lot of debt and have a habit of paying off only the minimum amount required each month, it shows a lack of discipline and could hamper your financial plan.
Cash advances
When you trade credit for cash, it is a red flag to lenders. The amount will be immediately added to the debt and can reduce the available credit you have. It will impact the credit utilization ratio and will bring down the credit score. Additionally, credit card companies tend to evaluate the behavior of the existing customers by running the credit report information through their system.
They often characterize the cash advance as risky. You could also be penalized for it. It will reduce the credit limit on the existing credit cards, and there are chances that the card will be canceled outright. This is a clear message to the lenders that you are a credit risk.
Collections
If you have a past due account, the creditors will sell the debt to a collection agency. It will have many negative implications on your credit. This includes the fact that your original account will be shown as “charge off” on the credit report. This is a sign that the creditor has given up on trying to recover the outstanding debt. It will reduce the credit score, and the collected information will remain in the credit report for seven years.
You may pay off the debt in the future, but the score will still be affected. It will undoubtedly show the lenders that you are making attempts to improve your financial habits. This will happen whether you are aware of it or not. Irrespective of the amount or the size of the bill, there will be a big effect on the credit report. For example, if you are a victim of identity theft and you are not aware of it, it will impact the credit report, and it will take time and a lot of effort to undo it.
Not having a diverse credit profile
You may not want to apply for a lot of credit cards in a short period of time, but you must also try to build a diverse credit profile. It is important to investigate the credit mix and always have a diverse mix like a few credit cards, mortgage, or a car note. If you have made regular, on-time payments, you will show that you are financially responsible and can handle the finances well.
It is better to have a diverse credit mix. It is a great representation of your ability to manage all your financial obligations. Only sign up for a new card or take a loan when you are sure you can make the payments on time.
Using the maximum credit available
If your credit report shows a large balance on all the accounts, lenders may see it as a red flag. It is not normal to pay the minimum amount every month. It is a sign that you are not able to pay the amount in full. The credit utilization rate, the amount of credit you use divided by the credit limit, significantly impacts the credit score.
Everyone has two utilization rates- one per their credit card and then another when you divide the card balance by the amount of credit available on all the cards. Having a credit utilization ratio below 30 percent will help. You must also pay the bills in full each month. You can have a low credit utilization ratio by paying down the outstanding credit balance and leaving the credit card accounts open.
Cosigning for a deadbeat
If you co-sign someone else’s loan, you will be considered responsible for their debts. If the person cannot pay the amount, lenders will assume that the burden is on you, and you will become a risky candidate for the new credit or loan. Hence, always think twice before you become a cosigner for anyone.
A short sale on your home
In a short sale, the lender will settle for less than the outstanding amount on the mortgage. This is considered a better closure for the seller than a foreclosure, but it is a red flag for all new lenders, as shown on your credit report. The information about the sale on the report will show the lenders what really happened, and if you had delinquent payments that led to the short sale, it would show for seven years. Additionally, even if the payments were made on time but the full amount was not paid, it will hurt the credit score.
Unauthorized activity due to identity theft
A major reason to regularly check your credit report is to ensure that your identity is not stolen. If you do not check it regularly, lenders could get the wrong idea about your creditworthiness in identity theft. Identity theft happens when somebody tries to steal your name, birth date, and Social security number. Using this information, they can open new credit card accounts, use the card and leave them unpaid.
You might not be aware of this, but it will leave you with red flags on the credit report and lower the credit score. If you are looking for identity theft prevention, you should keep all your personal information safe offline. Keep the Social Security card at home and remove mail that has any identifying information. Remember to password protect all the devices. You can always review the credit report and avoid this situation. When you notice any fraudulent information on the account, inform the credit reporting agencies right away.
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Different lines of credit
It is a huge mistake to open different lines of credit. When you open a credit card account from time to time, it is normal, but if you open three to four accounts in a very short period, it is not normal. This is a red flag to fraud and could signify to the lenders that you are in financial trouble. Many people manage to open multiple accounts, but it can lead to high-interest rates and an adverse credit profile if you are unable to pay the debt. You should never open multiple credit cards in a short period.
More debt after purchasing a home
For the majority of us, the mortgage is our most significant debt. A credit report red flag is to apply for more credit right after taking out a mortgage. Even if you have a small mortgage, it will run into six figures. When you apply for a lot of credit in a short period, it is a red flag, and lenders will not consider you financially responsible. You can avoid this mistake by paying bills before the due date and do not apply for credit in a short period.
The bottom line
Take the proper steps and stop the red flags from waving at lenders by building strong financial habits. Change unstable habits or practices that show erratic financial behavior. It will give creditors the green signal to fund your dreams. It is possible to avoid having red flags on your credit report. Remember to pay off the outstanding on your credit accounts and check the credit report from time to time. If you notice any misinformation in the payment history, contact the agency for the same. Also, avoid opening new accounts unless necessary, as it will lead to credit inquiries and could affect the credit score.
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Writer
Vandita Jadeja is a financial writer and editorial assistant at Joywallet. She loves to read and write about money and brings 7 years of experience from the financial industry. She loves coffee, mountains and sunsets.
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