What Is Impaired Credit?

What Is Impaired Credit?

Let me explain what impaired credit means. It typically points to a decline in how creditworthy someone or something appears—whether that's you as an individual, a business, or another entity. For individuals, this shows up as a lower credit score, and for businesses or others, it's a downgraded credit rating. If you're dealing with impaired credit, you'll find it tougher to get loans, and if you do, expect to pay higher interest rates. This can be a short-term issue you can fix, or it might signal bigger financial problems ahead.

How Impaired Credit Works

Impaired credit usually stems from financial strain due to unexpected changes in your situation. If you're an individual, it might come from losing your job, facing a major illness, seeing your assets drop in value, or any crisis that makes paying bills hard. For a company, it could be from tougher competition, a sluggish economy, supply problems, or poor decisions by management, among other reasons.

How Creditworthiness Is Assessed for Individuals

For you as an individual, credit scores are the straightforward way to measure creditworthiness. These scores come from your credit report data and are given as a three-digit number, usually from 300 to 850. They weigh various factors differently. With FICO scores, which are the most common, it's payment history at 35%, amounts owed at 30%, length of credit history at 15%, credit mix at 10%, and new credit at 10%. Generally, below 580 is poor, 580 to 669 is fair, 670 starts good, 740 is very good, and 800 is exceptional.

If your score has fallen from good to poor, you're likely credit impaired. Since payment history and amounts owed make up nearly two-thirds of the score, issues there are common culprits. Payment history checks if you've paid on time, so late or missed payments hurt. Amounts owed looks at your credit utilization ratio—the debt you owe versus your available revolving credit. For instance, if your cards have a $20,000 limit and you owe $10,000, that's 50% utilization, which scores penalize if it's high. You might have a reason for higher balances, but your score still suffers. If you stay current on bills and reduce debt, you can rebuild your score over time and shake off the impaired label.

Note on Business Credit Scores

Beyond ratings, some companies get business credit scores, also called commercial credit scores, from places like Dun & Bradstreet, Equifax, and Experian.

How Creditworthiness Is Assessed for Businesses and Governments

Credit rating agencies evaluate businesses, governments, and similar entities, giving them letter grades instead of numbers. They also rate the debt these entities issue, like bonds. Key agencies include Fitch Ratings, Moody's Investors Service, S&P Global, and AM Best for insurance. These are private firms, often paid by those they rate. Their systems vary, but grades run from AAA (top) to C or D (bottom), based on repayment likelihood.

A big drop in grades means the entity is credit impaired. Ratings consider many factors, tailored to the entity type. For corporations, S&P Global looks at financial metrics, economic and regulatory influences, management, governance, and competition. For governments, it focuses on fiscal performance, economic stability, monetary policy, and institutional effectiveness.

What Is Credit Repair?

Credit repair involves steps you or someone on your behalf takes to remove damaging info from your credit report that hurts your score. Remember, only inaccurate information can be removed—accurate stuff stays until it ages off, typically after seven years.

How Can You Obtain Your Credit Report?

You can get your credit reports from the three major bureaus at AnnualCreditReport.com. By law, you're entitled to one free report from each every 12 months. If you spot errors, especially ones dragging down your score, challenge them—the bureau must investigate.

How Can You Obtain Your Credit Score?

You might get your credit score for free from your bank or credit card issuer. Some trustworthy sites offer free scores too. Keep in mind there are different scoring models, so you have multiple scores, and the free one might not match others exactly.

The Bottom Line

Dealing with impaired credit isn't ideal for anyone—individual, business, or government. But you can often turn it around by fixing what caused the drop in your score or rating to begin with.