December 15, 2013
How your driving can affect your credit
When you get behind the wheel, your habits and choices could put your credit at risk. Here's how to avoid getting your credit dinged.
My daughter recently turned 15, and one of the first things she did on her birthday was to take an online test required to get her learner’s permit. She passed, and now she’s driving. I don’t have to lecture her on safe driving habits; she’s been doing that to me for years. And she’s more up to speed on the rules of the road than I am.
Car wrecked on road guardrail © NULL, OJO Images, Getty ImagesBut what I do have to explain is how driving may affect her credit in the future. They don’t teach that in Driver’s Ed, and it’s something most of us don’t think about until it affects us.
Here are four ways that driving can have significant, long-term impact on your credit.
1. Tickets and fines
If you get a ticket for a traffic or parking violation, it shouldn’t show up on your credit reports. But if you don’t pay the fines that result, the balance may be turned over to a collection agency, and that collection account may very well show up on your credit reports. Collection accounts, regardless of the reason or the amount, can be score killers.
Generally, collection accounts remain on credit reports for up to seven and a half years, even if they have been paid. But there may be special provisions in place that will allow for these accounts to be removed when the debt is paid. For example, in Washington, D.C., the Department of Motor Vehicles reports that the collections agency it hires “has agreed to automatically send an account delete record to the credit bureaus that it utilizes. This means that the record of your delinquent debt should disappear from credit bureau records within two to four weeks after payment in full is made.”
If you have unpaid tickets, check your free credit reports to see if they appear on your reports as collection accounts. Then check with your state’s department of motor vehicles to find out if they will be removed from your credit reports if you pay what’s owed. Even if that is not the case, you’ll want to resolve those accounts so the amount due doesn’t continue to grow. In some jurisdictions, failing to pay these debts can even cause your license to be suspended.
2. Car payments
An auto loan can help or hurt your credit, depending on how you manage it. One of the factors that most credit scoring models look at is your “mix of credit.” In many scoring models, it makes up about 10% of your score. You’ll score better for this factor if you have a variety of types of credit accounts; for example, if your report lists both revolving accounts (such as credit cards) and installment accounts (such as vehicle or student loans). If you want to see how your account mix is affecting your credit, check your free Credit Report Card, which will grade you on each of the five major credit reporting factors.
In addition, if you co-sign a car loan for your child (or anyone else for that matter), their loan will likely appear on your credit reports and will be treated as your own. Even if payments are made on time, the debt can affect your credit scores.
Miss a payment, however, and your credit scores may plummet. Recent late payments can lower your credit scores significantly and are especially problematic if you want to finance another vehicle or refinance your current loan since payment history on current and previous auto loans is an important factor in the scoring models used to evaluate auto loan applications.
In the worst-case scenario, where you fall behind on payments and your vehicle is repossessed, that repo will stay on your credit reports for seven years. Plus, the lender may try to collect a deficiency (the difference between what you owed and what they sold the vehicle for), and even file a lawsuit for that amount. If they win, you’ll have a judgment on your credit reports as well.
If you are charged with driving under the influence of alcohol or drugs, the DUI will not appear on standard credit reports. But the costs of a DUI -- even for first-time offenders -- are staggering, and often cost $5,000 or more. Trying to come up with the money for attorney’s fees, court costs, bail, towing, higher insurance premiums, etc., can put a strain on your budget and cause you to fall behind on other bills.
Or you may find yourself having to max out your credit cards or get a loan to pay those costs, resulting in higher balances on your credit reports. Those higher credit card balances can hurt your credit scores.
There were some 10.8 million motor vehicle accidents in 2009, according to the U.S. Census Bureau. These accidents don’t just wreck vehicles; they sometimes destroy people's credit as well. Accidents may involve property damage that may not be covered by insurance, or large medical bills that aren’t covered in full.
Even with adequate insurance, it can take time for insurance companies to sort out who pays for what, and to pay policyholders or providers. In the meantime, it’s not unusual for medical bills to go unpaid. If medical providers aren’t paid quickly enough, they may turn those bills over to collections; again, damaging credit reports.
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