Credit – How Does it Go Bad, & How Can You Fix It?

All of the useless stuff they taught us in high school and they never bothered to teach us about credit. The one thing that could so easily go bad and so drastically change every part of our lives.

What is Credit?

How does it go bad?

And is it bad forever?

 

What is Credit?

Credit is defined by wikipedia as “A number representing the creditworthiness of a person, the likelihood that person will pay his or her debts”.

The most common method of scoring is called FICO. Established in the late 1980’s as Fair, Isaac and Company, this type of scoring is used by most financial institutions today. Though there are dozens of ways to measure it, most systems go from about 300-850, with 580 being the cut-off for most mortgages. A 580 is generally considered poor, a 620 is considered fair, a 700 is considered good and above that is generally considered great.

This score is generated separately by the three major credit reporting bureaus (Experian, Equifax And TransUnion)  based on a number of factors. Your score may differ at each of these bureaus depending on the data each of them have received, because not all creditors report to all bureaus.

The factors these bureaus take into consideration are:

Payment history

Current debt to income

Age of credit history; how long your accounts have been in good standing

Types of credit used

Inquiries; every time someone checks your credit pending a purchase

 

How does it go bad?

Well, the short answer to this question is Easily.

Having not been taught about this in school, a large chunk of americans find themselves at the mercy of their credit score without even understanding why. Though I am not an expert on credit, I have learned a lot through my work and my own experiences, and will share with you what I know.

More and more common everyday, people become victim to identity theft. Having experienced this myself, I can attest to how frustrating this is. Charges added to your credit history that you did not make. Fortunately, this can be easily removed from your credit report. Though if not removed, they can be very damaging. This brings me to my next point;

Even just one 60 day late payment can drop a credit score up to 200 points! Think about that, if you had a 775 and had a rough couple of months and missed a payment a couple of times, you could go from a great credit score to poor. Just like that! But with a good credit history and a quick repayment, a lot of creditors are pretty quick to forgive.

With the current way of measuring credit (though this will change soon) a medical bill that was later discovered by the creditor to not be covered by your insurance could end up affecting your credit. This could be something as cheap as $5, but will go onto your credit as a collection, which will drag you through the mud in no time.

Collections in general are the scourge of the credit world. A collection comes when a debtor becomes so far delinquent on a bill that the original creditor gives up all together. They instead sell that debt to a 3rd party collections agency. These agencies will immediately attack your credit. They will do anything they need to to get that money, including settling for less than you originally owed, which can be good news for you!

We don’t have enough time to get into the shambles that a divorce or bankruptcy will make of your credit.

But if you’re in this situation, there is hope!

 

Is it bad forever?

It doesn’t have to be!

Today we have more tools available to monitor and rebuild credit than have ever existed before! Sites like creditkarma and creditsesame not only give you the ability to look at your current credit scores FOR FREE, but they also show you what is going wrong, how to fix it, and allow you to create disputes on anything that shouldn’t be there. And there is a never ending supply of companies that will work with you to rebuild your credit from the ground up in just months!

From setting up payment plans, or settling collections, to rebuilding with secured credit cards, credit is easier to fix now than it has ever been. The hardest part is getting yourself there mentally.

With things like credit and finance, it is easy to feel overwhelmed and just try to ignore it, but it will most definitely not ignore you. Take it step by step, day by day, focus on one thing at a time and fix it completely before moving on to the next.

Pretty soon, you will find yourself proud of the credit score you have built for yourself.

Remember, I am not a finance professional, nor do I work in the credit industry. This is not an ad, nor is it a guaranteed way to fix your credit. Instead, this is an attempt to help you better understand something that you should have been taught when you were in school, and hopefully, if you are in a situation with a bad credit score, this will inspire you to take those first steps to make it better. It definitely gets easier after that.

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