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When good people have bad creditDec 14 '00 (Updated Feb 21 '06) Write an essay on this topic.The Bottom Line Bad credit isn't the end of the world. Read my February 2006 update at the bottom. You can do it. One of the most common misperceptions about people with bad credit is that they are bad people. I know. I am one. Not only is this misperception false, but it is damaging to the people who must live with this scarlet letter. People have many different reasons for getting in debt over their heads. Some people lose their jobs; some incur significant medical bills. People get divorced and are left with too much debt while others simply take on more than they can pay. I am one of those people who was never taught money management skills. I honestly didn't know what a credit report was until I was well into my 20's. As outrageous as it may seem, no one had ever discussed it with me. I remember when I got my first job in high school and wanted to get a bank account. My father would not allow it. He was very old-fashioned (and a little backwards in this respect) and felt that it was unnecessary. He even yelled at me for wanting one. So, when I was finally out on my own, I was COMPLETELY unprepared for financial management. But despite all of the above reasons, some people truly don't care about their debts. I have met people with debt and with no intention of paying it back. Regardless of why you have credit problems, it is not the end of the world and the problem can be remedied. The biggest thing to remember is that this problem was not created overnight and it will take time to fix. What constitutes "bad credit?" For starters, there is a HUGE difference between having bad credit and having no credit. If you have no credit, you are not necessarily a bad credit risk, but you *are* considered a risk because they cannot determine what your payment habits will be like. From a creditor's perspective, a "bad credit" risk is someone who has established a poor payment history. This could include anyone who has a history of late payments, non-payments, collections, judgements, wage garnishments and bankruptcy. There are also other factors that can contribute to you being declined for credit like: Over-extension (having too much debt for your income level) Job instability: creditors want to see that you can hold down a job. This is obviously important because if you jump from job to job or have regular periods of unemployment, they will assume that there will be a time in the near future when you will be unable to make payments because of unemployment. Unstable residence: They want to be able to find you if you cannot pay your bills! I'm sure there are other factors, as well, but these are the major ones. How credit works Before you can fix your credit problems for good, you should first understand how credit works. It is a fairly simple system that is used as a standard for most financial institutions. First, every person has a credit file. There are three main credit bureaus that maintain consumer credit information: Equifax (www.equifax.com), Experian (www.experian.com) and Trans Union, LLC (www.tuc.com). Almost 100% of credit decisions by credit granting institutions use information obtained from one of these three bureaus. They are like the FBI of your financial history. They know more about you than you probably ever want to know. Whenever a new credit file on you is opened (i.e., you get a new credit card or loan), these three agencies are notified. They know how much the credit is for, the length of the repayment period, etc. Each agency compiles a file on you and gives you a score based on your repayment history for each account. This score allows creditors to easily determine your credit risk factor. While the credit system does use a numerical scoring system--particularly for mortgage loans--there is also a letter grading system similar to a report card. The scores range from AAA through D. It becomes increasingly more difficult to obtain credit the lower your grade. Derogatory credit remarks stay on your credit report for seven years--bankruptcies for 10-12. While it is nearly impossible to get credit once you dip below the C level, there ARE lenders/creditors who specialize in these types of credit risks. Know your credit The first thing that you should do is obtain a copy of your credit report. This is very easy to do. You can do so by snail mail (U.S. Postal Service), over the Internet (I provided the links above) or by telephone (the telephone numbers are available on their websites). No matter which of the three bureaus you use above, they will need: Your Name Social Security Date of Birth Addresses for the last five years Driver's license number, state of issue Gender The cost of credit reports vary from state-to-state. The last time I ordered mine, the average price was $8. Some states allow their residents to order one, free credit report per year (It is STRONGLY encouraged that everyone check their credit at least once per year. Even if you have good credit, erroneous information and mistaken identities can find their way onto your report). Also, if you have been denied credit within the last 60 days, you can mail the rejection letter that you received to the credit agency listed on the letter to receive a free copy of your credit report. THEY ARE OBLIGATED TO HONOR THAT BY LAW. It should take roughly 8-10 days to receive your report. Once your report arrives, review it carefully. Look for inaccuracies. If you see something wrong on your credit report, notify them in writing, as soon as, possible. You should notify all three agencies. The agency will then contact the creditor in question and they will have 30-days to respond to your inquiry. If the creditor does not respond within 30 days, they are required to remove the erroneous information from your credit files by law! How to begin the road to credit recovery First of all, don't get frustrated. When you have bad credit, or a lot of debt, it can be very discouraging to look at your credit report. Don't avoid it. It is something you have to face. It is like written proof of your imperfection (and in my case, stupidity). Just take comfort in the fact that you are not alone (I'm here). The first thing you should do, is sit down and write down the name of each of your creditors and how much you owe them. Include bills that are NOT listed on your credit report, as well. Second, determine your actual income per month. Third, figure out how much you have to spend on rent; utilities; loans; insurance; groceries; gas; child-care; and other MUST PAYS. Subtract that amount from your monthly income. The remaining amount of money is what you have to divide up between your creditors. You will note that I included loans as a MUST PAY, but not credit cards. Lenders are not flexible when it comes to repayment terms. Usually, if you cannot make your loan payments, they will recall your loan (make it all due at once, immediately). If your loan is recalled, anything you may have used as collateral (i.e., car/house) may be seized. Creditors like credit cards and medical bills are much easier to make payment arrangements with. Based on the amount of money that you have left over, you will need to make payments to all of your creditors. All or nothing It is a common mistake for people with bad credit to think that if they are behind or don't have all of the money that they should not make a payment. This is FALSE. It is better to pay your creditor $10 a month than nothing. Call each one of your creditors and TELL THEM WHAT YOUR ARE ABLE TO PAY if you cannot pay the minimum. While they will not be happy that you are not paying the entire minimum due, they will certainly accept whatever you can give. Once you make a promise, KEEP IT. Creditors are more willing to work with you if you let them know what is happening to you and try to work with them. Don't hide by not answering their phone calls. Pick up the phone and tell them what you *can* do and do it. Rebuilding Once you start making regular payments, no matter how small, you are on the right path to credit recovery. One of the biggest things that has helped me to rebuild my credit is automatic payments. This is where they electronically debit the money from your checking or savings account every month. For those of us who have memory problems, this is an excellent solution. Just remember to deduct that amount from your checking account. Many creditors will also allow you to send in postdated checks. This is especially helpful for medical bills. I have paid off SEVERAL medical bills this way lately. During the last three years, I've had a couple of $10,000 plus medical bills. While insurance covered most of this, I still had to pick up a couple of thousand on my own. Basically, I wrote out checks for a specific amount (say $50) to be deposited every payday until the debt was paid off. It worked very well for both parties. They were happy because they knew they were going to get paid. And even though it took a while before the debt was actually gone, I felt like a weight was lifted off my shoulders when they had the checks. Consistent, timely payment is extremely important. Establishing brand new, *shiny* credit You won't have to look very far for new credit once you establish a regular payment habit. There are plenty of creditors out there now who specialize in consumer's with imperfect credit histories. But, if you want to be proactive and search out these companies, a few of them are www.capitalOne.com, www.providian.com, www.aria.com, www.crosscountrybank.com, www.aspireyes.com and I'm sure there are many others. I can tell you right now, that I was accepted by www.aria.com at a time when I couldn't believe it. I was given a $200 credit limit at first. With regular, timely payments (they review you regularly), I was upgraded to $500, then $900. My husband started with a Providian card at $500 and he is now up to a $2000 limit. They really do try to reward good payment habits. They also report GOOD PAYMENT HABITS to the agencies. I have to tell you, though, that the interest rates are OUTRAGEOUS. But when you don't have credit or are trying to rebuild, that doesn't matter much because the choice isn't yours. However, we have been discriminating in the types of cards we have accepted. Always read the terms on the back of the credit offer. Usually, the will include information about grace periods, interest rates, annual fees, acceptance fees,etc. Some offers are not worth it--even if you need the credit. Try to wait because if one offer comes, another one will probably follow. Eventually, you will see a decent offer come along. Once you begin establish a clean record (generally after two or more years), you will want to start applying for "regular" credit cards and gradually close out your "high risk" accounts. This will serve two reasons: (1) Non-high-risk credit cards pay lower interest rates; (2) better credit card companies may be turned off by high-risk credit companies on your report. Some companies like Providian, Aria and Capital One, have their own divisions for higher credit grades, so it may not be necessary to close out your account. They may upgrade you as your credit continues to improve. There are also any number of buy here/pay here and rent-to-own businesses now. These are good for home furnishings, appliances, etc. They do not do credit checks. The interest rates that they charge you will be excessive. Expect to pay a *much* higher than retail value price. Even car dealerships have special programs for people with less-than-perfect credit or bankruptcies, especially in larger cities. If you cannot find a dealership in your area who will work with you, try to get to the nearest big city. I guarantee you there are dozens who will gladly accept your business. Keeping it clean Once you begin to rebuild your credit, it is imperative that you keep it clean. Even though derogatory credit remarks remain on your report for seven years, it usually only takes two years before you will begin to see a difference in your credit rating. After two years, you should notice a marked improvement in the availability of credit to you (providing that you have caught up and kept current all of your debt). To help maintain a good credit rating, remember these rules: Always pay on-time Be choosey about what you apply for/accept: too much credit is almost as bad as no credit and can lead to a poor credit rating. Stay within your credit limit Review your credit report annually for errors/trouble Control spending. Don't spend up to your limit Everyone makes mistakes. With some effort and time, you *can* turn your credit around. Don't give up. UPDATE (October 2005): We were able to purchase our first home in 2004 with a 5.5% interest rate. I started off with HORRIBLE credit in 2000, but I followed my guidelines and we have dramatically improved our financial situation. I just want people to know that there is REALLY hope. I know first-hand. UPDATE (February 2006): All of my credit card interest rates are currently 0% introductory, with long-term rates of under 20%. My lowest is around 9 percent fixed (this is from 30%). After making timely and consistent payments on all of our debts since 2001, we just called all of my husband's credit card companies (Providian and Capital One) last week and got 15% knocked off one interest rate, and roughly 17% taken off another (his rates are now 15% and 12.99). It was very easy to do, and only took a few moments. We simply called them and told them "We'd like to see if we qualify for a better interest rate." The customer service people were very friendly, and very helpful, and they gave us new rates right there on the phone. It feels so good to qualify for regular credit now!  |
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