What
Causes Bad Credit?
There are
many factors that cause bad credit. Some people may not realize the impact
the certain decisions will have on their credit until it is too late.
It is HIGHLY RECOMMENDED that you thoroughly read this section and place
great importance on increasing your credit score/fico score because it
will save you more money than any job promotion or side job that you could
work at. For More information on how much bad credit can cost you, click
here.
For starters the reasons your credit score will go down are: Inquiries,
Late Payments, Charge Offs, Repossessions, Foreclosure, Judgments, and
Bankruptcy.
Inquiries:
Inquiries are caused by companies looking at your credit report for the
possibility of issuing you credit. This may be from a credit card company,
a mortgage company, or a utility company. Some companies don't place inquiries
on your report, but it is rare. The way in which inquiries hurt your credit
is that it take 30-60 days for credit to show up on a report, sometimes
longer. A credit issuing company is very skeptical of someone who has
applied to a lot of credit recently because they don't know what you were
accepted for or not. For example, say you applied for 5 credit cards all
at once and got all of them. You then have 5 new credit cards which haven't
shown up on your credit report, yet the inquires have. So rather than
risking giving another credit card to a customer and risking abuse, they
would deny you for excessive inquires.
Solution:
Inquiries usually fall off within 6-12 months and do not have a lasting
affect on your credit. They are not negative marks, but more of an instant
guide for the creditors to protect themselves from fraud.
Late Payments: Probably the most common of all bad marks
on your credit, and the gateway to the serious credit marks, late payments
are exactly what they say they are. It tells the credit agencies that
you weren't able to pay your bills on time or forgot to send the payment
in. Either way it tells the agency that you're a higher risk customer.
This will cause your credit score to move down and will cost you more
on your future home and car loans. The types of late payments are 30 days
late, 60 days late, 90 days late and 120 days late. The later you are,
the more it damages your credit. Late payments stay on your credit report
for 7 years from last date reported.
Solution:
Pay your bills on time! Do whatever it takes to pay any bill that has
your credit tied to it on time. If you have late payments and would like
to get the resolved, you make look into signing up for a credit repair
service. These services challenge the bad listings and usually get them
removed within 3 to 18 months, depending upon severity.
Charge
Offs: These are interesting methods creditors use to save on
taxes. A charge off is where you haven't paid your bill for a long time
and it is apparent that you're not going to pay it at all, or are unwilling
to pay it. The company then decides to take this prospective income off
the books and write it off as a loss to bad debt. When they do this it
creates a new mark on your credit report (thus starting the 7 year time
frame all over). These marks stay on your credit for 7 years from last
date of activity. This means, that if the charge off is updated for any
reason, the time gets reset and it is 7 years from that date.
Solution:
If you are having trouble paying your bills, and have old outstanding
debts, consider looking into a debt settlement company.
Repossession:
Simply put, if you don't pay the bill on your car the bank is going to
come and pick the car up whether you like it or not. It is a one time
occurrence (per car) and usually leaves you with a deficiency after the
bank has sold the car. For example, say you bought a brand new $40,000
BMW on a $10,000 a year salary. You quickly realized you couldn't pay
for the car so you stopped making the $700 monthly payment. The bank sees
this and decides they need to get the car back and try and recoup some
money from it, so they repossess it in the middle of the night. Three
weeks later the bank is able to resell the car for $30,000, leaving a
$10,000 "deficiency" between the amount you owed and the amount
they sold it for. You are responsible for the $10,000 deficiency, and
until you pay it back it will stay on your credit report (unless the bank
doesn't renew the listing, which is rare).
Solution:
If you've bought a car that you soon realized you couldn't afford, the
first step would be to try and sell the car on your own. Banks are terrible
at selling cars and often sell them for much less than you could sell
it for. If you already have a repossession on your credit report with
a deficiency, then try to save a little bit of money and talk to the bank
about settling the debt you owe for a lesser amount. If the bank is unwilling
to settle, talk to a debt settlement company or a lawyer about what steps
they could assist you with. Usually you can settle old debt for 10-40%
of what you owe.
Foreclosure:
Foreclosure is similar to repossession except you are evicted from your
home if you do not pay. Usually this time frame is longer than the repossession
time frame. The title automatically switches over to the note holder (regardless
of what you owe on the house). This will stay on your credit report for
7 years from last date of activity.
Solution:
If you have too much house for what you can afford, attempt to sell the
house. If selling the house isn't available, they you might consider a
foreclosure alternative or foreclosure prevention program, in which they
negotiate the foreclosure and payments to give you some breathing room.
If you are in too much house to begin with, this only delays the problem.
Judgements:
A judgement could stem from any of the above problems. Essentially, if
a creditor is having trouble getting money from you, they'll try to take
you to court and "force" the money out of you through our tried
and true legal system. This may result in garnishment of your wages. Garnishment
results in a court order in which your employer is required to take out
a certain amount or your paycheck each payroll period and send it to your
creditor.
Solution:
If you have old debts that are getting garnished, there isn't much you
can do. Debt settlement companies usually can't touch judgements because
it takes quite a bit of time and effort. If you do have judgements, then
you should consider trying to negotiate directly with the company for
a lower settlement amount, and saving up some money to make the settlement.
If there is no way you can afford to live with the garnishment, and the
debt is substantial, you may want to consider looking into bankruptcy.
For more information about bankrtupcies, visit BankruptcyAlternativeHelp.com
Bankruptcy:
Typically Bankruptcy is a last resort solution to financial woes. If you
can't see any feasible way out of the debt you have accumulated, bankruptcy
is a way to wipe the slate clean (of debt, not credit) and start over.
To read more about the types of bankruptcies and some alternatives, visit
BankruptcyAlternativeHelp.com.
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