Credit Issues
Bankruptcy often brings a mixture of relief and guilt. There's relief that the creditors will now stop calling and the bills have disappeared. At the same time, there is the guilt of having failed to pay your bills off and filing for bankruptcy. You are probably also experiencing fear that you are now labeled as "bankrupt" and at the bottom of the barrel financially. Those who recover the fastest, though, are those who make a choice to move forward with their lives. Here is how:
Uh oh, you've been turned down for a loan. What's the next step? Should you check your credit? Figure out why you were turned down? Apply for a loan somewhere else? First you should relax and take a deep breath.
Believe it or not, being turned down for a loan can be a good thing. Being turned down for a loan alerts you to a problem with your credit or your financial situation. The trick is to use this opportunity to get the problems fixed!
The first step is to figure out why you were turned down. You'll receive a letter from the lender shortly that describes why you didn't meet the lender's criteria. You'll also receive instructions for ordering a free credit report from the credit bureau the lender used to process your application. You are entitled to this free "adverse action" credit report by law.
"Credit problems? No problem!"
"We can erase your bad credit - 100% guaranteed."
"Create a new credit identity - legally."
"We can remove bankruptcies, judgments, liens, and bad loans from your credit file forever!"
Does all this sound too good to be true? Well, it is. These are the typical claims of shady credit repair organizations (CROs) which often victimize unwary consumers - usually, the most vulnerable consumers who are struggling with bankruptcy or have had problems rebuilding damaged credit reports and credit scores. These companies promise, for a fee, to clean up your credit report so you can get a car loan, a home mortgage, insurance, or even a job. Generally, they can't deliver. After you pay them hundreds or even thousands of dollars in fees, these companies do nothing to improve your credit report - most simply vanish with your money. Rather than improving your credit, you may end up deeper in debt and see your credit score actually get worse.
So exactly how "bad" is bad credit? It might be more appropriate to call bad credit something else. Perhaps it should be called "anything but good" credit, because that's really what it boils down to.
Just to clarify, when we talk about "bad" credit, we're specifically referring to a consumer's credit reports and credit scores. The problem that consumers face is that they improperly define bad credit as being any credit report with bad stuff on it. And, they make the same mistake going the other direction too. They define a good credit report as any credit report that doesn't have anything bad on it. Neither is correct, because those definitions are simply too broad to be accurate. It's much more granular than that, and to really understand the differences between bad credit and really bad credit we have to get into the minutia.
Everyone knows of and possibly believes in a great myth. Whether it's the Loch Ness Monster, Bigfoot, Alien Crop Circles or the Abominable Snowman we're all hooked to some extent. But unless you seriously have plans to spend time across the pond diving for prehistoric marine mammals then your belief probably won't become a serious threat to your wallet.
Your payment history, also known as payment performance, is the record you've established by either paying or not paying your bills on time. This history is recorded on your three credit reports which reside at the three U.S credit reporting agencies: Equifax, TransUnion and Experian. Your credit reports will reflect your payment history on any credit account you've had in the past 7 to 10 years. This includes, but is not limited to, student loans, mortgages, bank and retail store credit cards and auto loans.
How is your debt listed and displayed on your
credit reports?
Each account on your credit report has a section that lists your current balance. This balance is generally the amount you owed on the account as of your previous month's statement. This "staggered balance" practice is common regardless of whether the account is a mortgage, auto loan, credit card or some other type of credit account.
In the past two months we explored Payment History and Your Amount of Debt and their level of impact to your credit scores. So far we've identified 65% of the points that make up your credit score as being generated out of these two categories. This month we will look at one of the lower value categories: the types of accounts in your credit report. This category makes up 10% of the points in your credit score. So, while it's certainly not a priority to address, anyone who has hopes of maxing out their credit scores should pay attention.
We've now covered three of the five categories that represent the points that you earn, which make up your credit score. In the past three months we've explored Payment History, Your Amount of Debt and the Type of Accounts in Your Credit Reports. To quantify those three categories is very easy. Collectively they will make up 75% of the points in your credit scores. The "point" range (also known as the "scale") of the commonly used credit scores is 300 to 850 so that means that even if you earned the maximum number of points out of our previous categories your score will be no higher than 638 which is significantly below the national average. That makes these next two newsletters just as important as the first three.
This is the last of a five part series investigating credit scores and how your credit-related actions most influence them. Each edition of the series explored a new category chosen because of the amount of credit score "points" that each could cost you if not managed properly. So far we've explored the following four...
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