The Good News About Bad Credit
Bad credit sounds rather final and conclusive when, in fact,
it is usually a temporary and fixable condition. In order
to understand bad credit and what you can do about it, it’s
important to first understand how your credit came to be labeled
“bad” in the first place.
It usually starts with your credit score. Credit bureaus
use a mathematical formula to compare the information in your
credit report to the information in millions of others. This
“magic” number has proved to be a pretty good
predictor of what your credit behavior will be like in the
future. Your score may differ slightly from one credit bureau
to another because different information has been reported
to them.
The credit score is greatly influenced by your payment history
– that is, how promptly you have made the payments on
your credit cards, mortgage, auto and other loans. The amount
of your current credit limit is also considered, along with
the amount of debt you have against that limit. “Maxed-out”
credit cards will, obviously, have a negative effect on your
credit score.
Credit scores typically fall between 300 and 850, the larger
score indicating a better credit risk. It’s interesting
to note that most borrowers fall almost exactly in the middle.
Obtaining a credit score is a good first step for a lender
who needs to evaluate a potential borrower’s behavior.
It is not, however, the only factor which influences that
lender’s decision. The length of your credit history
and information on current credit activity also come into
play.
In the past, before credit scoring was implemented, lenders
would often see one negative factor on a credit report and
deny the loan without looking any further. Nowadays, consumers
with blemishes in their credit history, even those who are
90 days or more behind on their mortgage payments, can be
given access to credit. Because of their ability to better
predict the borrowers’ behavior, lenders now offer a
variety of loan products geared to consumers at varying degrees
of risk. Variables include interest rate and term of the loan.
If your credit history has been tarnished by late or missed
payments, bankruptcy, or referral of an account to a collection
agency, there are steps you can take to begin restoring your
credit. Remember that it will take some time to do the job,
but it can be done.
Get copies of your credit report from reputable credit bureaus.
Find out exactly what you owe and to whom. Check your credit
report for errors and if you find discrepancies, contact the
credit bureau immediately and request that they investigate.
(They are required to do so by law.)
Next, communicate with your creditors and establish a realistic
plan for repaying the debt. It’s better to arrange small,
regular payments than to skip payments because you can’t
afford them. Begin paying down your debt as much as you can.
A free, non-profit, credit counseling agency can help negotiate
with your creditors and can often make arrangements that you,
as an individual, cannot. Meanwhile, stop using credit! Don’t
apply for any new credit cards because those applications
can interfere with the credit counseling agency’s plan
and can do further damage to your credit report.
For more information about all types of credit and links
to credit bureaus, lenders and actual payment calculators
and loan applications, articles and advice, visit www.banklady.com,
your credit source for financial freedom.
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