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.