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How Bad Is Bad When It Comes To Your Credit Rating

Dec 25, 2007
If you're in a bit of a financial struggle lately, don't worry. Many people are. And as with anyone, it's likely that this financial struggle has probably affected your credit rating. If this is true, don't worry.

People are slapped with bad credit ratings for several reasons. In many cases, it's through no fault of their own. As an example, you might get a bad credit score just because someone at the credit bureau itself mistakenly entered inaccurate data. It may also be that you have a very common name, for example, and someone sharing your name defaulted on a loan, went into bankruptcy, or had some other financial hardship situation, and that person's information got entered in your credit report. Other situations include a recent move, where a credit card bill got lost in the mail and you forgot to pay it. Although this can be expensive, it's an honest mistake. Certainly, it should not so adversely affect your credit report.

If you have a bad credit rating, this does not mean that your reputation or access to financial services is damaged forever. Indeed, you can fix this situation almost immediately, but you have to do some work to do that. However, if you are consistently behind on financial payments, or have other financial struggles that are "permanent," this is not a quick fix situation and credit counseling may be the best bet for you.

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.

Of course, other reasons you have bad credit include being laid off from your job, which is becoming increasingly common in today's job environment. This in turn will affect how and when you can pay your bills, so if you've been responsible previously, suddenly having substantially reduced or no income can greatly affect just how responsible you can be with your bills.

A second reason this type of difficulty may occur is if you are facing foreclosure on your home. Even if you have a steady job, you can still face the situation. Many people bought overpriced homes in the previously inflated real estate market, and did so through lenders who were willing to cut corners to help them buy homes they really could not afford. Many of these homes also came with such substandard elements as adjustable-rate mortgages, which is where the rate starts out at a reasonable level that the homeowner can easily afford. However, then rates can suddenly spike with no warning, wherein the payment increases by several hundred to even a thousand or more dollars a month. In these cases, often foreclosure was the only way out of such a situation, which in turn affects the homeowner's situation.

Another situation you might find yourself facing is divorce. In fact, credit counselors have said that this is a very common reason for a sudden bad credit rating. Because assets have to be divided up between former spouses, and because there are often alimony and child support payments to consider, income that was previously adequate suddenly doesn't go as far as it used to.

Still another reason for bad credit is if your health is failing or if you are suddenly facing substantial medical expenses that cannot be avoided and yet that you cannot afford. With substandard or no medical insurance becoming an increasingly common situation, many individuals find themselves facing serious illnesses that they must take care of, yet cannot afford.

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.

Try to only spend less than 10% on "frivolous" expenses. Those things that you simply "want", but don't really "need"!

When you pay off debt, pay off the highest interest rate cards first. To do this, make the minimum payments on all of your other cards, then take the highest interest rate card and put all of your available "debt" cash toward that payment. Do this until you have paid off your highest interest rate card, then go on to the next. Make minimum payments on all of the lower interest rate cards, then take your highest interest rate card that still has a balance on it, and pay as much toward that as you can. You'll soon see that you can be debt free very 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.
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