Impaired Credit

Impaired Credit: What It Is and How to Address It

What is impaired credit?
Impaired credit describes a decline in the perceived ability of an individual, business, or government to meet debt obligations. For individuals it usually shows up as a lower credit score; for companies and governments it appears as a lower credit rating. Impaired credit makes borrowing harder and more expensive and can be either temporary (repairable) or a sign of deeper financial distress.

How impaired credit develops
– Individuals: Common triggers include job loss, illness, unexpected expenses, or a sudden drop in asset values that lead to missed or late payments or higher outstanding balances.
– Businesses and governments: Causes include weak financial performance, poor management decisions, increased competition, economic downturns, supply-chain disruptions, or adverse regulatory and geopolitical developments.

Assessing creditworthiness — individuals
– Credit scores: Most lenders use three-digit credit scores (typically 300–850). Scores are derived from information in credit reports.
– FICO score factors and weights (typical):
* Payment history — 35%
* Amounts owed (including credit utilization) — 30%
* Length of credit history — 15%
* Credit mix — 10%
* New credit — 10%
– Common score ranges:
* Below 580 — poor
* 580–669 — fair
* 670–739 — good
* 740–799 — very good
* 800+ — exceptional
– Credit utilization example: If combined credit limits are $20,000 and balances total $10,000, utilization is 50%. Higher utilization tends to lower scores.
– Typical causes of a sudden score drop: missed payments (payment history) and increased balances (amounts owed). Addressing those categories usually produces the biggest improvements.

Assessing creditworthiness — businesses and governments
– Rating agencies: Major agencies (e.g., Moody’s, S&P Global, Fitch) assign letter-grade credit ratings (AAA down to C/D) that reflect the agency’s view of default risk.
– Ratings consider financial metrics and qualitative factors:
* Corporates: profitability, cash flow, leverage, management, market position, industry dynamics.
* Governments: fiscal performance, economic conditions, monetary stability, institutional effectiveness.
– A downgrade of several notches indicates impaired credit for an entity or its debt issues.
– Commercial/business credit scores: In addition to public ratings, firms can have business credit scores from providers such as Dun & Bradstreet, Equifax, and Experian.

Credit repair and recovery
– Disputing errors: You can challenge inaccurate items on your credit report; bureaus must investigate. Only inaccurate or unverifiable information can be removed. Accurate negative information generally remains for up to about seven years (certain bankruptcies may have longer reporting periods).
– Improving an impaired individual credit profile:
* Bring past-due accounts current and avoid new missed payments.
* Reduce revolving balances to lower credit utilization.
* Keep older accounts open to preserve credit history length.
* Avoid opening unnecessary new credit.
* Consider working with creditors on payment plans or hardship arrangements if needed.
– For organizations, recovery commonly involves restructuring debt, improving cash flow, cost controls, strategic changes, or asset sales to restore financial strength.

How to obtain your credit information
– Credit reports: In the U.S., you are entitled to a free report from each major credit bureau at least once every 12 months through AnnualCreditReport.com. Review reports for errors and dispute them if necessary.
– Credit scores: Lenders, credit card issuers, and some financial websites provide free access to one or more credit scores. Different scoring models exist (FICO, VantageScore, and model variants), so scores can vary depending on the source.

Bottom line
Impaired credit reduces access to affordable financing but is often reversible if the underlying causes are addressed. Start by reviewing your reports, correcting errors, and focusing on timely payments and lower balances. For businesses and governments, meaningful operational or fiscal improvements are typically required to regain stronger ratings.