About Bad Credit

Bad credit is a reality for many consumers, but what exactly is bad credit? Neglecting to pay bills in a timely manner will result in bad credit, as will overextending the credit accounts you have. Avoid this expensive predicament by effectively managing your debt and staying in contact with you lenders if you do encounter trouble meeting your monthly obligations.

The Facts

Bad credit can refer to a low credit score or to actual items listed on a credit report, or a combination of the two. Although there is no definitive number indicating a bad credit score, must lenders deem a score of 500 or below as "bad credit." All lenders have their own credit scoring standards, so while one lender may consider 500 to be bad credit another might consider it a reasonable risk. Bad credit comes from making payments late or not at all or from overextending the accounts you have. Bad credit is not directly related to your income or employment history.

Risk Factors

Having bad credit can affect your chances of getting approved for revolving credit accounts and installment loans. The loans and credit cards that you are approved for will be at a higher interest rate than for someone with a better credit score, and you will also encounter more fees with less attractive overall terms. People with bad credit usually fall into the category known as sub-prime lending, so they wind up paying a lot more in interest and fees than they would have if they had a good credit score. A bad credit score can also affect your chances of getting employment and insurance coverage.

Misconceptions

It is a common misconception that bad credit can be cleared up very quickly by paying a company to contact your creditors. The truth is that it takes time to build up a credit score, especially if the consumer spent years wrecking it. No company, no matter how much they charge, can permanently erase bad credit from your credit bureau report.
Another misconception is that bad credit disappears from your credit report once you bring it current or pay it off. Negative items can stay on your credit report for years, making it difficult to get approved for credit at decent interest rates even after you bring all the accounts up to current status.

Time Frame

Bad credit can appear on your report as quickly as thirty days after you missed a payment. Negative credit items are usually reported as thirty days late, sixty days late, ninety days late and so on until they are reported as over 180 days late. The longer the account goes unpaid the lower the credit score will drop. It can also take some time for the lender to report an account as current after having been in delinquent status. Sometimes it can take as long as two or three payment cycles before your credit report indicates that you are no longer delinquent.

Expert Insight

Most financial experts agree that bad credit should be avoided as much as possible, although there are some times when bad credit seems inevitable. If a person suffers a job loss or medical emergency and does not have sufficient savings to fall back on, then it's often the credit score that suffers as bills go unpaid. Bad credit can take years to clean up, but many financial experts agree that it's worth the effort.