How Bad Is Bad When It Comes To Your Credit Rating

You've been slapped with a bad credit rating. Is it the end of the world? Not at all.

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.


The thing to remember is when you have a bad credit rating, don't think that you are forever barred from access to financial services when you need them. A bad credit situation is one of those "life events" that can be rectified immediately with due diligence on your part. But be warned: people who consistently earn bad credit ratings should not think that there is a quick fix because there isn't. They should instead seek credit counseling to "rehabilitate" their credit behavior.

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.

Reasons for Bad Credit: In some cases, of course, you can control the reasons you have bad credit, such as over-shopping and using credit cards carelessly. However, many times, the reasons you get into financial difficulty are beyond your control. For example, as previously mentioned, someone at the credit bureau may incorrectly enter information. Therefore, correcting the error made rectifies these types of bad credit situations.

There are other reasons why individuals have bad credit: being laid off the job - unfortunately, we live in an era of downsizing. Companies are slashing their budgets and trimming down staff numbers. When you are laid off unexpectedly, this can trigger off a string of events, some of which may affect your credit standing;

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.

divorce is another popular reason for credit problems - credit counselors say that this is one of the more common reasons for earning a bad credit rating. When assets have to be divided up between husband and wife and there are alimony and child support payments looming in the horizon, money becomes scarce;

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 that can be avoided is simply overstretching 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.

Ways to Avoid Bad Credit: Before you make any major purchases, make sure you access each of your three credit reports (one from each of the three major bureaus). Each consumer is allowed one free credit report a year from each of the three bureaus through the government web site annualcreditreport.com. If you need to keep track of your credit report more often than once per year, it might be a good idea to sign up with one of the many credit monitoring services available. These services offer "free" credit reports along with other services, usually charging a monthly fee. If you find that there are any inaccuracies in your credit report, report them immediately to the bureau in question in writing. Be aware that you must report any inaccuracies or challenges in writing. The bureau in question must respond to your challenge and either verify the information or remove it. You should also know that unfortunately, inaccurate information might reappear again later as the system cycles through, so you may have to do this more than once. Eventually, though, the information will despair and the fully cleared from your report. Be vigilant and make sure you do this.

If you want to repair your bad credit and restore and then maintain your healthy credit rating, you should:

Carefully track income and expenses. If you do this over the course of a month, you'll find many places, doubtless, where you overspend and can very easily cut back. For example, if you buy your coffee on the way to work, make it at home and take it with you. If you eat out, take your lunch. These two simple steps can easily save you as much as 0 a week or even more. To determine just how much you should be spending, make a budget. First, determine what all of your basic necessary expenses are. These include mortgage or rent payments, car payments, student loan payments, food, basic utility and fuel expenses, insurance, and the like. These expenses should comprise no more than 60 or 70% of your total take-home income. Your mortgage and home expenses should cost you about 30 to 35%, or about half of your basic "must have" expenses. Of the 30% or so remaining income, you should be saving 10 to 15% in retirement and investments if under the age of 35, or 20% if over 35.

Just say no to frivolous expenses - impulse shopping is a 21st century disease. We shop when we're feeling low. Exercise instead!

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.

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