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How Bad Is Bad When It Comes To Your Credit Rating

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

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.

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.

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.

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.

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

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;

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 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 authored articles about credit reporting and fair credit 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.