Bad Credit

Bad credit can prevent you from qualifying for a debt consolidation loan at favorable terms. Bad credit will cost you thousands of dollars in interest payments to credit cards, car and home payments.

Help For Bad Credit

What is Bad Credit?

The term “bad credit” is a lot like the term “pretty face.” It’s all in the eyes of the beholder.

Or in this case, the eyes of the lender.

Some banks, credit card companies and online lenders box consumers into a category based on their credit score. They tell you that if your score is below 630, you have “bad credit” and are unwelcome.

However, the bank, credit card company or online lender across the street says a credit score of 600, or maybe even as low as 580, is just fine for the loan you want, so sign right here!

The truth is that it’s difficult to get a consistent definition for “bad credit.” It’s a very subjective term. There are so many factors involved in the decision — credit history, stable employment, housing and yes, credit score – that you can’t be sure where you stand with a lender until you apply.

However, a safe definition of bad credit is when you have to accept high interest rates and very uncomfortable terms and conditions just to get a loan. Or, worse than that, when lenders take one look at your credit history and completely reject your loan application.

That’s when you know you have bad credit and it’s time to start looking at how it happened and ways to get away from it.

How Credit Agencies Define Bad Credit

FICO, Experian, Equifax and TransUnion, the major credit bureaus and agencies in the U.S., deal in numbers so you won’t get a solid definition from them of what bad credit is. They prefer numeric categories that allow consumers to float from one ranking to another in any given payment period.

Experian, Equifax and TransUnion use the Vantage Score method, which goes from 300 to 850. Experian says it keeps scores for 220 million consumers, almost one-third of which (28%) have bad credit.

Here is a chart produced by Experian with categories broken down by credit score and number of consumers in each category.

From Super-Prime to Sub-Prime to Deep-Prime: Vantage Score Breakdown

  • Super-Prime Credit Scores: 781-850 … 48.4 million people
  • Prime Credit Scores: 661-780 … 79.2 million people
  • Near Prime Credit Scores: 601-660 … 28.6 million people
  • Sub-Prime Credit Scores: 500-600 … 50.6 million people
  • Deep Sub-Prime Credit Scores: Below 500 … 11 million

FICO, the score most often used by lenders in credit decisions, also ranks consumers on a scale of 300-850, but the FICO scoreboard is a little more stringent.

The top end of the FICO scale is a more inclusive, but the bottom ends is far more demanding, which again emphasizes how bendable the definition is for bad credit. Here is FICO’s scale.

From Excellent to Poor to Bad: FICO Score Breakdowns

  • Excellent credit: 750-or higher … 20.4%
  • Good credit: 700-749
  • Fair credit: 650-699
  • Poor credit: 600-649
  • Bad credit: Anything below 600 … 20.7%

A FICO survey in 2016 found that 20.4% of consumer were in the exceptional credit category (800-850) and about the same number (20.7%) were in the bad credit range (under 600).

The good news is that the number of people with bad credit has been declining every year since its peak of 25.5% in October 2010. In the six years since then, more than 17.5 million consumers have raised their credit scores above 600.

In fact, in 2016 the national average for FICO scores was 699, the highest in history.

Consequences of Bad Credit

Bad credit is an epidemic in America, with more than half of all consumers strapped with such low credit scores that they can’t borrow at market rates.

Some families can’t finance a home, and poor credit means about a fifth of the population must turn to fringe financial services like payday loans or borrow from family members.

Low savings rates and stagnant incomes contribute to the problem. Poor credit hits families hard. They live close to the financial brink, just an expensive car repair or medical emergency away from insolvency. And they are often blocked from borrowing to buy homes, pay for cars and continuing education that might lead to better-paying jobs.

Repairing your credit can take time and requires thoughtful money management. Ruining a credit score, however, might not take long at all.

Consider what happened to Jimmy, who lost his job as a welder during the Great Recession. Though he was able to collect state unemployment insurance, it wasn’t enough to pay the mortgage or the expense of raising two small children.

Jimmy ran through his emergency savings in four months. When he stopped paying his mortgage, the bank foreclosed. His two credit cards also fell into default. By the time he eventually returned to work a year later, his family was living with a relative and his credit was flat-lined.

Jimmy’s credit repair job took several years. Even though his income bounced back, albeit at a slightly lower level than before the job loss, he was able to begin making payments on his credit card through a debt management program.

But the recovery had consequences. At first, he could only get a secured credit card. When his credit improved enough to qualify for a conventional credit card, he was shocked to learn that the interest rate on unpaid balances would be more than 25%. He also learned that he would have to wait several years to qualify for another mortgage loan.

For folks like Jimmy, a major financial setback is a double whammy. First there is the immediate loss of home and purchasing power of credit cards, then there’s the problem of re-establishing credit. Lending guidelines were tightened after the economic meltdown, making it even harder for those with tarnished credit to borrow money.

If your credit score falls in the lower regions of either the FICO or Vantage scale, the consequences on your financial life will range from annoying to outright depressing. Lenders use that score against you to impose higher interest rates on loans, longer payoff terms and bigger penalties for late payments. Each of those penalties gouge your bank account and damage your credit reputation.

Lenders make money when consumers pay back their loans. That is exactly what your credit score is meant to reflect: The likelihood that you will repay a loan. The lower your score, the less likely you are to repay that loan and the more likely you are to incur some kind of penalty.

For example, when you have bad credit and want to buy a car, the lender is taking a bigger risk that you won’t repay the debt so you will pay far more for the loan that someone with a good credit score. If you need to borrow $25,000 with a poor credit score, you’ll pay around 12% interest on a 60-month loan. That means $556 a month payments and $33,360 paid out over the life of the loan.

The same loan for someone with good credit, paying 3% interest would run $450 a month and $27,000 over the course of the five-year loan.  That is $6,360 wasted because you have bad credit.

If you’re ready to buy a home with bad credit, the consequences are magnified. Many lenders won’t even deal with consumers who have bad credit. If they do, the interest rate on a 30-year, $100,000 home loan in 2017 would be about 5.5%. That would mean monthly payments of $568 and total payout of $204,480, more than double what you borrowed to start with.

With good credit, the interest rate would drop to 4.97% ($535 per mo./$192,600 total) and with excellent credit, the rate would be 4.02% ($478 per mo./$172,285 total). That means bad credit cost consumers somewhere between $12,000 and $32,000 on their home.

The penalties for poor credit don’t stop at home and car buying. Insurance companies could refuse to write car, home or life insurance policies because of bad credit. If they do write the insurance, your rates could be as much as $1,000 higher every month.

Renting an apartment with bad credit is also challenging; utility and cell phone companies require larger deposits and employers who use credit history as part of the hiring process, may disregard your application because you have bad credit.

Finally, your bad credit could lead to a barrage of phone calls from debt collection agencies trying to run down payments that are past due.

In other words, bad credit is going to make your financial life difficult at best and costly at the worst.

“The first thing any lender wants to know if whether you’ve paid your credit accounts on time,” Can Arkali, principal scientist for analytics and scores at FICO, said. “That negative information has a considerable impact on your credit.

“The important thing to keep in mind is that the impact of negative payment information will be less damaging over time if you keep your credit obligations in good standing.”

In other words, make on-time payment credits every month and over the course of time, you can get rid of the “bad credit” label.

Improving Your Credit Score eBook

How to Improve Your Credit – eBook

Credit Booster is designed to lead you through a step-by-step process to enhance your usage of credit and management of your debt. Our goal is to get you INVOLVED in planning and working toward your financial health and “wellness.” The format of Credit Booster should serve as a useful tool that you can use to realize these financial goals.

How To Get a Loan with Bad Credit

Bad credit is a dark cloud over your financial situation, but there is a silver lining: You can still get a loan to bail you out if an emergency strikes.

The truth is that there are a lot of loan options for people with bad credit and some are even tolerable. The secret is to determine how much time and sacrifice you’re willing to put in to eliminate debt.

If you are conscientious about dealing with debt, any of the suggested choices could lift you out of the “bad credit” category and into a more favorable financial situation. It would help if you commit to on-time payments, making a budget (and sticking to it!) and using credit cards for emergencies only.

Bad Credit Loan Options

  • Clean up your credit report: Dispute debts with creditors, collection agencies and reporting bureaus of they are not yours. Get credit report education and take steps to improving your credit score through on-time payments and knocking out old debts.
  • Start at your bank. If you have a checking or savings account, you have a relationship with the bank. They want your business for the next 25 years. Giving you a personal loan is a step in the right direction for both of you.
  • Join a credit union. Their nonprofit status allows them to relax membership rules, loan standards, interest rates and fees. A very good idea for people with bad credit.
  • Ask family or friends for a loan. This is simultaneously the best and worst choice. Be responsible and business-like about this and all parties will benefit. Miss a couple of payments and the benefits – not to mention relationships – will disappear quickly.
  • Find a co-signer. This might be the best way to go, especially if the co-signer has excellent credit. This allows you to use their credit score instead of yours and get the lowest interest rates and best terms. However, if you are late with payments, or default on the loan, you ruin their credit score as well as yours and possibly ruin the relationship as well.
  • Debt Management Programs. If you have credit card debt, this is a good spot to find help. Any credit score is welcome. This is not a loan, but a good debt management program will reduce your interest rates and lower you monthly payments while also offering credit counseling that should help you long term.
  • Debt consolidation loans. Banks will give you a one-time loan to pay off all debts, then you make just one monthly payment to them. Be sure the interest rate is lower and pay off time doesn’t put you deeper in debt.
  • Home equity loan. If you have owned your home for a number of years, you could borrow against the equity you have in it. The great thing about this is your credit score is not a factor. These are low-interest loans because the house serves as collateral.
  • Peer-to-peer lending. This is a mixed-bag for those with bad credit. Some peer-to-peer places won’t take applications unless your credit score is 640 or higher. Then there are places like Upstart, Prosper, Avant and First Financial that will take people with a 580 score or better. A low credit score could mean excessively high interest rates so be careful with this one.

If you’re not in a situation where you need a loan to get you through an emergency situation, it would be wise to spend some time cleaning up your credit score before applying. A 20- or 30-point bump on your credit score could be the difference between being labeled a bad credit risk and good credit risk.

And that will be the difference between paying interest rates so high they strangle your budget and interest rates that are manageable enough to give you some financial flexibility.

Adding another user to your credit card

Adding An Authorized User To Your Credit Card

My grandmother, Big Mama, didn’t like lending folks anything.

She wouldn’t let anyone borrow her fancy church-going hats. To my knowledge, she never lent her car to anyone. She wouldn’t lend money. And she especially wouldn’t let people borrow her good credit name – meaning she would not co-sign for a soul, not even me.

I used to think Big Mama was being mean. Sometimes people need help. But my grandmother was protecting herself.

Big Mama understood that when you lend something and it gets damaged, you are the one who has to deal with the aftermath. This is especially true when you let someone borrow the good credit history on your credit card by allowing them to become an authorized user. It’s called piggybacking.

Routinely, people in credit trouble are advised that one way to rebuild their credit is to get somebody – their mama, daddy, grandparent or friend – to add them on a credit card as an authorized user.

Piggybacking, in most cases, is a great deal for the person trying to establish credit or get a boost to their badly bruised credit history, according to Jonathan Alper, Florida bankruptcy and asset-protection attorney.

Treatment of authorized users can vary by card issuer. But generally, adding an authorized user to your credit card account lets the credit history of that particular card be transferred to the new user’s credit files. Positive and often negative information on the card can be added to the authorized user’s credit files.

The authorized user has your permission to use the card, but he or she has no contractual responsibility to repay any of the charges on the card, including charges the user makes, according to Rod Griffin, a spokesman for Experian, one of the three major credit bureaus.

Clearly, if someone is trying to improve their credit history they should only be added to an account in which the cardholder has had the card for a long time and used it wisely – paid the account on time and kept balances low. That positive information can significantly help the authorized user’s credit scores.

Piggybacking doesn’t work in the reverse. The credit history – good or bad – of any unshared accounts of the authorized user has zero influence on the credit reports of the cardholder, according to Craig Watts, the public affairs manager for Fair Isaac Corp., which created the widely used FICO credit-scoring system.

Although authorized users can be chased down by creditors if the primary cardholder fails to pay, Alper said in his experience he sees far more examples of  parents – particularly elderly parents – who allowed someone to become an authorized user and got left with their grown child’s debt.

A lot of folks don’t realize that in their effort to help a credit-challenged child, relative or friend, they put themselves at risk.

Here’s an e-mail I recently received from a woman now burdened with $2,800 because she let someone piggyback. She wrote, “I have a friend whom I added to my account as an authorized user. She transferred her debt from another credit card so that she could get zero percent (interest) for a year and pay it off. A year passed and she is not able to pay it. Now she has decided to file for bankruptcy since she found out she is qualified. What are my options?”

The friend had transferred $3,500 to this woman’s credit card and only managed to pay about $700 on the debt.

“It’s like lending a car to a friend,” Alper said. “If you loan out your credit card or car with permission and something happens, you are liable.”

Alper said if he were advising the e-mailer’s friend (the one who is planning to file for bankruptcy), he would tell her to list the credit card and the friend in her filing because legally, the e-mailer can sue her friend for failing to pay the debt as promised in their oral agreement.

“I don’t want to sue her,” the e-mailer wrote back to me after I told her what Alper said. “I am going to pay myself and close the account. My husband is not happy, but I don’t want a debt hanging on my account.”

How sad. If this story still doesn’t discourage you from adding someone as an authorized user, at least take the following suggestion from Alper: Lower the credit limit on the existing card or get another card with a low credit limit. Set the limit to something you can pay if the authorized user can’t.

And if you feel guilty about not helping someone build their credit, try this line Big Mama used on me: “If the bank, which has a lot more money than me, won’t take a risk on you and give you credit, why should I?”

By Michelle Singletary


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