A Good Credit Score

A Good Credit Score

How Bad is Bad When it Comes to Your Credit Rating

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 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.

Yet another reason for bad credit is failing health or suddenly facing substantial medical expenses that you cannot avoid and yet cannot afford. In these days of substandard or no medical insurance, many, many individuals find themselves facing serious to life-threatening illnesses and must either face lasting consequences or even death without treatment, or use medical treatment that they may not be able to pay for.

Finally, the one situation that many Americans find themselves in that can be avoided is simply over stretching their own spending means by “borrowing” money from credit cards for frivolous or over-consumptive shopping. In today’s “plastic” society, many people have 1, 2, 3, 4 or more credit cards and have each maxed to the limit, so that even minimum payments are difficult to come by on their budgets, not to mention full payment of purchases made every month so they are truly living within their means.

How Can You Avoid Bad Credit? Before you make any major purchases, make sure you visit the site annualcreditreport.com. This site is government-regulated and allows consumers one free credit report from each major reporting bureau annually.

If you are someone who needs to keep track of your credit report more often than once year, it may be a good idea to sign up with one of the monitoring services that offer “free” credit reports along with a myriad of other services, usually for a monthly fee.

If you find any inaccuracies in your report, make sure you report them to the bureau in question in writing. They must respond to your challenge and either verify the information or remove it if it is inaccurate. Be aware that unfortunately, the information may reappear again later, so be prepared to do this one or more times before it is fully cleared from your report.

To further avoid bad credit and maintain healthy credit rating, you should:

Take stock of your financial situation – jot down all sources of your income and how you’re going to spend that income. Create a budget and stick to it. Discipline in spending works in your favor – banks are more predisposed to lending money to individuals who exhibit prudence;

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

Pay off high interest debt first – paying 17% to 21% interest on unpaid balances is excessive. Pay off your balances on these high-rate credit cards first. We know how difficult it is to make additional payments on minimum payments, but if you can do so, you pay off the entire balances sooner.

Finally, the last way to make sure your credit rating will be restored is to pay your bills on time — all of them. Mortgage, utility, tax payments, and other bill payments made on time show creditors that you are prudent and diligent in your spending practices, which will reflect positively on your report.

So if you’ve found yourself with bad credit, don’t worry. If you take some time to pay bills on time, pay off credit card debt as described above, and remain prudent in your spending, you’ll be back to good standing in very little time.

Steven J. Talrechi has authored articles about credit agencies and fair credit practices for over a decade. He specializes in helping others get a second chance checking account and second chance bank account when they have been turned down by banks.

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