My Financial Solutions

 What Is Bad Credit?

On many occasions I here clients say that there credit is not that "Bad". Well first of all there is no in between, your credit is either good or bad. I've never heard of or saw a creditor approve credit based on someones credit not being that bad. So, this week I am addressing the question of What Is Bad Credit?

One of the many challenges of having bad credit is figuring out exactly how bad you’ve got it. It’s important to know exactly how bad you are so you can save yourself the time and frustration of applying for the offers that are tailored to the highest risk consumers. And, while it might sound difficult, it’s really not that hard if you’re willing to do a little work.

There are many online services that will sell you credit scores and credit rankings. However, if you’re short on cash or you don’t have a credit card, there’s another way to go about it. Everyone in the country is entitled by Federal law to get a free copy of all three of his or her credit reports once a year. You can claim these free reports online at www.annualcreditreport.com or you can make your request by phone by calling 1-877-322-8228. Or, if you don’t have the time to deal with it, you can simply fill out the required forms and mail them.

Once you have your three reports, you will need to take an inventory of the information. What you are trying to determine from your reports are two things:

1. Is there a presence of derogatory information; and
2. How much debt are you carrying?

If you have anything on your credit reports that is considered a major delinquency, it’s hurting your credit rating. If you have a lot of this information, it’s likely causing your situation to be bad to the point that lenders will avoid you for the time being. Here are some general rules that you can follow to interpret the derogatory information on your credit reports;

Any information appearing in the public records section of your credit report is considered a major delinquency

Any information that is, or logically can be assumed is, equal to or worse than a 90 day late payment is considered a major delinquency. This would include foreclosures, collections, severe late payments, repossessions, and settlements.

Any of the above information that is less than 12 months old is particularly nasty and is having a catastrophic negative impact on your credit rating.

If you have multiple items that fit the “major delinquency” description, you’re being penalized for the abundance as well.

Now that you’ve gotten a pretty good idea of how bad your bad credit really is, it’s important to determine if your debt is compounding your problems. This is a surprise to some people because the prevailing myth in the credit world, as stated earlier, is still “a good credit report is a credit report without any bad things on it.” And, while that’s partially true, it’s certainly partially untrue.

our level of debt is as important as your demonstrated willingness to pay your bills on time. If your debt is excessive, it can further lower already low scores or slow your recovery. Here are some general rules that you can follow to interpret the amount of debt that you are currently carrying;

Add up the total number of accounts that have a balance. The more you have, the lower your scores could be.

Add up the total number of credit card accounts with a balance. Again, the more you have, the lower your scores could be.

Determine the utilization percentage of the credit card accounts that are currently open and on your credit reports. You can do this by dividing the credit card balances by their associated credit limits. The higher this percentage, the lower your scores will be.

The worse situation possible would be if you perform poorly areas according to all three criteria. If you fair poorly in all three areas, you are most likely considered to be so bad off that you can’t even get loans from sub-prime lenders. And if this is the case, you need to start re-establishing your credit.