Tuesday, December 25, 2007

Gotten Some Bad Credit On Your Permanent Record?

By Steven J. Talrechi

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.

If your credit rating is less than good, it doesn't mean that it will be this way forever. You can begin to fix the situation almost immediately, but you have to do some work to accomplish this. Now, if you're constantly behind in financial payments or if you have other financial struggles that you've always dealt with because of poor money management, then you will not have a quick fix. In this case, credit counseling may be the best option for you to consider.

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 do People Have Bad Credit? Just as natural disasters are phenomena that humans can't control, bad credit is one of those things that you can't control either - but only up to a certain extent. By this we mean that errors are committed by third parties like in the examples we cited earlier. Many are a result of clerical error.

Other reasons you might have bad credit is if you lose your job or are laid off. Unforeseen, this is an increasingly common situation in today's job environment. In turn, this will affect how and when you can pay your bills, so even if you've been a very responsible consumer previously, if you suddenly have substantially reduced or no income, you will have great trouble paying your bills and therefore will look irresponsible, even though the actual difficulty is through no fault of your own.

A second reason this may occur for you is if you are suddenly facing foreclosure for your home. Even people with steady jobs face this situation, since many bought overpriced homes in the previously inflated market through lenders who were willing to cut corners to help them buy homes they really couldn't afford. Many of these homes also had such risky elements as adjustable-rate mortgages, where the rate starts out at a very reasonable level and which the homeowner can pay easily. Then, however, rates can suddenly spike and this can increase the mortgage payment by hundreds or even a thousand or more dollars a month. Facing these types of situations, even homeowners who have previously been responsible about making mortgage payments are suddenly faced with a mortgage they cannot pay. In this case, foreclosure is often the only way the situation can rectify itself.

Yet another situation you might find yourself facing is divorce, which can also adversely affect your credit rating. In fact, many credit counselors say that this is a very common reason to suddenly have a bad credit rating when it's previously been good. In divorces, of course, assets must be divided between former spouses. In addition, there are often alimony and/or child support payments to make as well. Therefore, income that previously was entirely adequate suddenly isn't enough.

failing health can ruin a lot of credit ratings - people who fall ill unexpectedly or are suddenly suffering from a disability will not be able to continue working. We see here a domino effect: loss of health = loss of job = loss of earning potential = limited cash

Finally, over-stretching one's credit limits can do the most damage- it amazes us how people's wallets are overflowing with plastic. Instead of keeping one or two credit cards, they have 10! In addition to the usual cards like MasterCard, Visa, Diner's and American Express, they also have credit cards from department stores, gas stations, and other retailers. When one card is maxed out, they simply use the next one.

Avoiding Bad Credit Here's the golden rule on bad credit: before making any major purchases, request for a free copy of your credit report from Equifax or Trans Union. When you read something that you believe is false or inaccurate in the report, write a letter immediately and ask for proof or ask that the report be corrected immediately. Whatever you say to the credit bureau should be executed in writing. This is the only way you can show proof that you acted in good faith. Don't wait for weeks before questioning your credit report.

To further avoid bad credit and maintain 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 $100 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.

Try to only spend less than 10% on "frivolous" expenses. Those things that you simply "want", but don't really "need"!

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, pay all bills on time - this applies to your mortgage, utilities, taxes and other bills. If you miss making punctual payments too frequently, this oversight on your part will be reflected in your credit report. Bad credit is no reason to panic. Be vigilant over your credit report, be prudent in your spending and be disciplined in respecting your budget.

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