How Bad Is Bad When It Comes To Your Credit Rating

If you've had a little bit of trouble financially lately, you're not alone. And of course, this little bit of trouble might have affected your credit rating. If so, not to worry.

People obtain bad credit ratings for many reasons, and in half of the cases, it's not their fault. For example, you could get a bad credit score simply because someone in the credit bureau made an error in entering the data. Or someone with the same name as yours defaulted on a loan and then registered that default under your name. Or else you moved to a new house and last month's credit card bill got lost during the shuffle and you forgot to pay it. An expensive mistake, for sure, but an honest one. Failing to make minimum payments on a credit card consistently is definitely bad news, but forgetting once or twice to make a payment does not merit condemnation.

If your credit rating is less than good, it doesn't mean that it will be this way forever. You can begin to fix the situation almost immediately, but you have to do some work to accomplish this. Now, if you're constantly behind in financial payments or if you have other financial struggles that you've always dealt with because of poor money management, then you will not have a quick fix. In this case, credit counseling may be the best option for you to consider.

As evidence that bad credit is prevalent and common, the US Trustee Program of the Department of Justice has approved credit counseling agencies to help people with bad credit problems. You can go to their web site at: www.usdoj.gov/ust/eo/bapcpa/ccde/cc_approved.htm. In the box where it says "approved agencies by state", you enter the state or district you live in and click "go." You get a list of credit counseling agencies that are available in your area.

Why Does Bad Credit Exist? In many cases, of course, the reasons you have bad credit are completely under your control. Among them are compulsive shopping, overspending, living beyond your means, et cetera. However, in many cases, you cannot control the reasons bad credit have happened to you, such as when personnel at the credit bureaus incorrectly enter your personal information. If you correct errors made in these types of situations, your credit rating will be restored quite easily and quickly.

Other reasons you might have bad credit is if you lose your job or are laid off. Unforeseen, this is an increasingly common situation in today's job environment. In turn, this will affect how and when you can pay your bills, so even if you've been a very responsible consumer previously, if you suddenly have substantially reduced or no income, you will have great trouble paying your bills and therefore will look irresponsible, even though the actual difficulty is through no fault of your own.

A second reason this may occur for you is if you are suddenly facing foreclosure for your home. Even people with steady jobs face this situation, since many bought overpriced homes in the previously inflated market through lenders who were willing to cut corners to help them buy homes they really couldn't afford. Many of these homes also had such risky elements as adjustable-rate mortgages, where the rate starts out at a very reasonable level and which the homeowner can pay easily. Then, however, rates can suddenly spike and this can increase the mortgage payment by hundreds or even a thousand or more dollars a month. Facing these types of situations, even homeowners who have previously been responsible about making mortgage payments are suddenly faced with a mortgage they cannot pay. In this case, foreclosure is often the only way the situation can rectify itself.

Yet another situation you might find yourself facing is divorce, which can also adversely affect your credit rating. In fact, many credit counselors say that this is a very common reason to suddenly have a bad credit rating when it's previously been good. In divorces, of course, assets must be divided between former spouses. In addition, there are often alimony and/or child support payments to make as well. Therefore, income that previously was entirely adequate suddenly isn't enough.

failing health can ruin a lot of credit ratings - people who fall ill unexpectedly or are suddenly suffering from a disability will not be able to continue working. We see here a domino effect: loss of health = loss of job = loss of earning potential = limited cash

Finally, the one situation that many Americans find themselves in and that can be avoided is simply overspending on "frivolous" expenses that they don't need. To do this, they "borrow" money from credit cards to live beyond their means when it's simply not necessary. Increasingly, today, society lives on "plastic," and many people have 2, 3, 4 or more credit cards that they use at will to buy things on credit they could easily do without. When it gets bad enough, even minimum payments are impossible to make and this can cause an adverse credit rating.

Avoiding Bad Credit Here's the golden rule on bad credit: before making any major purchases, request for a free copy of your credit report from Equifax or Trans Union. When you read something that you believe is false or inaccurate in the report, write a letter immediately and ask for proof or ask that the report be corrected immediately. Whatever you say to the credit bureau should be executed in writing. This is the only way you can show proof that you acted in good faith. Don't wait for weeks before questioning your credit report.

Here are other ways to avoid bad credit (or better still, how to maintain a healthy credit standing):

Keep careful track of both expenses and income. Once you do this over the course of a month, you will doubtless find many ways where you can "trim the fat." For example, if you eat out every day at work, you can save yourself several dollars a day, or as much as $50-$60 a week, if you pack your lunch instead of eating out, and reserve lunch out as an occasional treat instead of an everyday occurrence. To best create your budget, first start by jotting down all of your "must-have" expenses. These include your mortgage or rent payments, any car payments, student loan payments, food and basic utility and fuel expenses, insurance, etc. *All* of these expenses should comprise no more than about 60-70% of your total take-home income, with your mortgage and home expenses comprising no more than 30 to 35%, or about half of your "must-have" expenses. The remaining 30% or so should be divided such that you're saving 10 to 15% in retirement and investments of your income every month if you're under 35 years of age, or 20% if you are over 35.

Really understand what you NEED to spend money on. We are a nation of excess. Frivolous expenses must be avoided while trying to repair your credit rating.

When you pay off credit card debt, you want to pay the highest interest rate credit card off first. In order to do this, you need to make the minimum payments on all of your other cards, and then apply the rest of your money to the highest interest rate credit card you have. Do this each month until the highest rate credit card is paid off, and then move on down to the next highest interest rate credit card. Make minimum payments on all of your other cards, and then take the balance of your allotment and put it all on the highest interest rate credit card you have. Continue doing this until all of your credit cards are paid off. This should happen relatively quickly, as long as you practice discipline and diligence.

Finally, make sure you pay your bills on time. Making mortgage, utility, tax and other bill payments on time shows that you are diligent and prudent in your spending practices and this will reflect positively in your credit report. So if you've got bad credit, don't panic. Simply taking some care to pay bills on time and be prudent in your spending, as well as keeping a careful watch on your credit reports from all three bureaus, will bring you back to good standing in very little time.

About the Author

Steven J. Talrechi has been writing about credit agencies and credit reporting practices for over 10 years. His specialty is helping people obtain a second chance checking account and second chance bank account when they have been turned down by banks. You can get a unique content version of this article.

Comments

No comments posted.

You do not have permission to comment. If you log in, you may be able to comment.

Complete the details below to send a link to the page:
http://uniquebusinessarticles.com/small-business/how-bad-is-bad-when-it-comes-to-your-credit-rating.html