Bad credit sounds quite decisive and irrefutable when, in effect, it is mostly a transitory and repairable situation. Just to be familiar with bad credit and what you can do about it, it’s imperative to first understand how it came to be marked as Bad.
It typically begins with your score. Agencies use a mathematical rule to contrast the information in your report with the data in millions of others statements. This “magic” number has confirmed to be a very good estimator of what your behavior will be like in the future. Your score may vary somewhat from one agency to another because of the diverse information reported to them and measured.
Your score is significantly affected by your payment history – that is, how punctually you have made the payments on your credit cards, mortgage, auto and other loans. The amount of your current credit limit is also considered, together with the total debt you have against that limit. “Maxed-out” credit cards will, obviously, affect negatively your score.
Scores usually fall between 300 and 850, the larger score representing a better credit risk. It’s interesting to note that most borrowers fall almost exactly in the middle. Finding your score is a good first step for a lender who needs to evaluate a potential borrower’s behavior. Though, it is not the only factor which influences that lender’s decision. The extent of your history and the information on your actual credit activity also take part in.
In the past, before the implementation of scoring, lenders would frequently see one negative factor on a report and reject the loan without looking any further. Nowadays, customers with an imperfect account, even those who are 90 days or more behind on their mortgage payments, can be given access to credit. As a result of their skill to better predict the borrowers’ behavior, lenders now offer a diversity of loan products oriented to consumers at varying degrees of risk. Variables include interest rate and duration of the loan.
If your history has been flawed by late or missed payments, bankruptcy, or referral of an account to a collection agency, there are steps you can take to start re-establishing your credit. Bear in mind that it will take some time to do the job, but it can be done.
Get copies of your report from trustworthy agencies. Realize accurately what you owe and to whom. Verify your report for errors and if you discover discrepancies, get in touch with the agency as soon as possible and request that they investigate. (They are obliged to do so by law).
Subsequently, contact your creditors and set up an accurate strategy for repaying the arrears. It’s healthier to coordinate small, steady payments than to skip payments because you can’t manage to pay for them. Start paying down your debt as much as you can. A free, non-profit, counseling agency can assist negotiate with your creditors and can frequently make arrangements that you, as an individual, cannot. In the meantime, stop using credit! Don’t ask for any new credit cards since those applications can interfere with the counseling agency’s strategy and can do further damage to your report.
In conclusion, might not be as easy as you would like, but at least you have a good starting point to repair your credit, before obtaining your loan.