We all make financial mistakes at some point in our lives. Maybe you forget to pay a bill due to some stressful life circumstances, or maybe you have to let a credit card payment slide because you simply don’t have the money to pay it.
Of course, many of us go through even worse financial circumstances: foreclosure, bankruptcy, long-term unemployment, and the like.
It’s tempting when caught in the midst of these situations to drown in your despair. You may feel like you’ll never overcome the mistakes you’ve made with your credit in the past.
But the fact of the matter is that our credit reporting system is set up to reward financial responsibility – even if you’ve made mistakes in the past. All reported credit problems – from the relatively minor 30-days-late payment to the majors of bankruptcy or tax liens – will eventually be erased from your credit report.
One key to overcoming credit mistakes is understanding how long they’ll stay on your report, and what kind of impact they’ll have on your credit.
The longest-standing item on your credit report will be a bankruptcy. A Chapter 7 bankruptcy will stick to your report for ten years from the filing date, while Chapter 13 bankruptcies stick around for seven years from the discharge date. Keep in mind that the time limit on a Chapter 13 doesn’t start ticking until after the bankruptcy is discharged – normally within three to five years of filing.
Tax liens are another major no-no. Unpaid tax liens will stay in your file indefinitely, but once you’ve paid them or they’ve been settled and released, they’ll typically stay on your file for around seven years. The good news is that you may be able to withdraw the tax lien from your report if it’s paid in full.
Government-related credit mistakes can hit hard again in the form of student loans, which can stay on your report for seven years from the date they’re paid or seven years from the date they’re first reported, depending on the situation. Bottom line: pay your taxes and your student loans!
Other items that will stay in your credit file for seven years include delinquent child support payments, judgments, collections, charge-offs, settlements, repossessions, foreclosures, and late payments.
But Your Credit Can Still Improve
While these major and minor items will stay in your credit file for a number of years, even after you’ve solved the underlying problems (like catching up on late payments or paying a tax lien), you can still improve your credit even while they’re present.
As mistakes like these age, they have less and less of an effect on your credit score. Sure, a bankruptcy will have a pretty strong negative effect for a few years. But if you play your cards right, you can mitigate that effect by making better financial decisions starting as soon as possible.
If you have problems like these sitting on your credit report, don’t despair. You can still improve your score with the basics: paying bills on time and keeping credit card and other revolving debt balances low. Over time, good financial habits will translate into a better credit score, so that once those mistakes do drop off your credit report, you’ll be sitting on some excellent credit!
–Abby Hayes is a freelance personal finance writer and contributor for personal finance blog Dough Roller. She spends her spare time bargain hunting for her family of three.