Impaired credit typically refers to a deterioration in the perceived creditworthiness of an individual, a business, or another entity. For individuals, this is often showcased in a lower credit score, and for businesses and other entities, it’s reflected in a decreased credit rating. Those with impaired credit will find it significantly harder to obtain loans and will typically face higher interest rates if they do manage to secure financing. This condition can be temporary and fixable but can also signify a path toward further financial distress.
Key Takeaways
- Impaired credit refers to a decline in the creditworthiness of a person, business, or other entity.
- Individuals will see this as a lower credit score, while organizations may have a lower credit rating.
- Borrowers with impaired credit face challenges in obtaining loans and generally incur higher borrowing costs.
- It is possible to repair impaired credit by addressing underlying issues.
The Mechanisms of Impaired Credit
Impaired credit usually emerges from financial stress due to unforeseen changes in circumstances. For individuals, this may result from job loss, expensive medical bills, a severe drop in asset values, or other critical events that impede regular bill payments.
For companies, impaired credit may stem from rising competition, an economic downturn, supply chain disruptions, or poor management decisions.
How Creditworthiness Is Assessed for Individuals
For individuals, credit scores are the most accessible measure of creditworthiness. Based on one’s credit report, these scores range from 300 to 850 and are calculated using various factors:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
Scores below 580 are considered poor, 580-669 are fair, 670-739 are good, 740-799 are very good, and 800-850 are exceptional. Those who once had good credit scores but now have poor ones are considered to have impaired credit, often due to issues in payment history and amounts owed.
Example Scenarios
If Jane’s credit score has fallen severely due to missed monthly payments and accumulating debt, she’s considered credit impaired. Jane can potentially restore her credit by consistently making her payments on time and reducing her debts.
Credit Ratings for Businesses and Governments
Credit rating agencies gauge the creditworthiness of businesses, governments, and other entities, grading them with letters instead of numbers. Major such agencies include Fitch Ratings, Moody’s Investors Service, and S&P Global. The ratings span from AAA (best) to C or D (worst), determining how likely an entity is to repay debt.
A drop in credit rating signifies impaired credit for an entity. Considerations include financial health, market conditions, economic performance, regulatory frameworks, and management efficiency.
Business Example
A company like XYZ Corp’s decline in credit rating due to a combination of market competition and recent management errors is indicative of credit impairment. Consistent efforts to improve financial performance and management practices can lead to a restored credit rating over time.
Credit Repair: Bouncing Back
Credit repair commonly involves steps to remove detrimental info from a credit report, aiming to enhance the overall credit score. Notably, only inaccuracies can be removed. For accurate yet negative information, the wait until it ages off the report is necessary (typically seven years).
Acquiring Your Credit Report
You are entitled to a free credit report from the three major credit bureaus every 12 months through the official website, AnnualCreditReport.com. Reviewing and disputing errors on these reports can be a critical step in improving your credit.
Getting Your Credit Score
Free credit scores may be available through your bank or a reliable online service. Remember, multiple credit scoring models exist, so the score you see may not align perfectly with other versions.
The Bottom Line
Having impaired credit is suboptimal for individuals, organizations, or governments. Fortunately, addressing the factors that have caused reduced credit scores or ratings can bring about improvements.
Related Terms: credit score, credit rating, credit report, credit utilization, creditworthiness.
References
- myFICO. “What’s in My FICO Scores?”
- Experian. “What Are the Different Credit Scoring Ranges?”
- S&P Global. “Guide to Credit Rating Essentials”, Page 10.
