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What is a Credit Impairment?

Malcolm Tatum
Updated May 16, 2024
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Credit impairment is any type of activity that leads to the reduction of the credit rating enjoyed by an individual or a business. There are many different events that can lead to impaired credit. Some triggers for damaged credit have to do with specific actions taken by the debtor, while others are due to circumstances outside the control of that debtor. In any instance, the result of credit impairment is difficulty in obtaining credit or borrowing money, due to the decreased confidence of lenders in the ability of the business or individual to repay the debt according to terms.

One of the most common reasons for credit impairment is the consistent late payment of debt obligations on the part of the debtor. The slow payment is typically reported to credit agencies, which then factor those late payments into the calculation of the debtor’s credit worthiness. Over time, failure to pay outstanding debts according to terms leads to FICO score reductions that may take years to recover.

A similar scenario involves situations in which the debtor has the desire to honor his or her obligations, but suddenly lacks the resources necessary. The loss of a job and the resulting loss of a steady flow of income will have an adverse effect on the ability to pay car loans, mortgages, credit card balances, and any other type of debt. Since credit ratings are based on both the ability to pay debt on time and the amount of income generated by the debtor, losing a job can result in credit impairment from two directions.

At times, credit impairment comes about due to events beyond the control of the debtor. The death of a spouse and the subsequent loss of income may lead to financial difficulties that damage the credit rating of the surviving spouse. In like manner, an extended illness that creates additional debt while also limiting the ability of an individual to generate income would also increase the likelihood of default and make it harder for the debtor to obtain additional credit or financial assistance from lenders. Even if the credit rating is not damaged enough to prevent the debtor from borrowing money, the new lender is likely to charge a higher rate of interest as one way of minimizing the degree of risk he or she is assuming.

When some type of credit impairment takes place, it is important to begin the process of repairing the damage as quickly as possible. Beginning to pay obligations on time will go a long way toward reversing the downward trend in the credit rating. Securing a new job that comes with a salary that is similar to the former source of income will also help stabilize and eventually renew the credit rating and FICO score. As more debt is retired and the ratio between debt and income becomes more favorable, the credit rating will slowly begin to improve. While the process can take a great deal of time and effort, the end result is usually worth the trouble.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including SmartCapitalMind, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
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Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
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