In my *very small* corner of the world, I know three families who have struggled with the effects of bad credit.
These are their stories (names have been changed to protect the innocent):
Scooby & Shaggy
Scooby & Shaggy met when she was in her early 20s. She had a one-year-old daughter and was working in a salon. He was in his 30s and was working as a car salesman.
After several months of dating, they decided to move to a completely different city and start their life together.
Little did she know, he had gone through a very damaging divorce years before and his credit was trashed.
His ex-wife had been hoarding money instead of paying bills and he had to file for bankruptcy to clear all of the defaulted accounts.
Being in love and in her 20s, Shaggy was naive to what it meant to have good credit and she followed Scooby’s instructions to put car loans, store cards, and traditional cards in her name.
But, one day, after several years of “sharing” her credit and doing nothing to repair his, Scooby and Shaggy went to a loan officer to see about getting a mortgage.
Shaggy was heartbroken to learn that Scooby’s credit had gotten even worse over the years because he had defaulted on payday loans that she didn’t know he was securing.
But, what really made Shaggy mad was that her credit had been damaged over the years by putting all of their accounts in her name.
She reached out to a credit counselor and learned what she needed to do to improve her credit score enough to qualify for a mortgage loan.
After two years, Shaggy had increased her credit score by 180 points and, lost about 250lbs (she dumped Scooby).
Now, Shaggy lives in a beautiful 3BR/2BA house in the most desirable neighborhood in town and the mortgage is 100% in her own name.
Ren & Stimpy
Ren & Stimpy met in high school. They were good friends throughout their high school career and kept in touch after high school also.
About five years after they graduated, they realized they were in love and they wanted to get married.
Ren had been working in a local business since he got his first work permit and, right around the time they were getting married, Ren & Stimpy were given the opportunity to purchase the business.
It seemed like a natural fit.
Ren knew the ins and outs of the business operations and Stimpy had a knack for customer service.
So, they bought the business and proceeded to run it for nearly 15 years. They had three children during that time and their kids were fixtures at the store.
Unfortunately, things came to a screaming halt when a national chain moved to town and gave Ren & Stimpy some serious competition.
Ren & Stimpy held on tight. They fought and clawed and tried everything they could think of to stay in the running against their conglomerate neighbor.
But, it proved too much for them to conquer and, eventually, Ren & Stimpy had to close their beloved business and file for bankruptcy.
It has been almost seven years since they lost their business. Ren & Stimpy both have hourly jobs that they don’t like, they live in a 2-BR home with their three kids, and they have two car payments.
All in all, their finances have recovered from their bad credit experience. But, their pride and their overall happiness have not.
Sylvester & Tweety
Sylvester & Tweety were both married to other people when they met. But, the heart wants what the heart wants.
So, they broke the news to their significant others and started the divorce proceedings.
Tweety’s divorce went fairly smooth. Her ex agreed to split everything down the middle and didn’t argue about selling the house.
Sylvester’s divorce dragged on for a year, during which he paid for all of his ex-wife’s bills because she was a stay-at-home wife during their marriage.
She took her time finding a job and Sylvester racked up a huge amount of credit card debt making sure that her bills were paid.
He probably could have bounced back from that, but being the sneaky cat that he is, Sylvester went and started himself a drinking problem and got fired from his job.
Tweety stood by him and, after about 9-months of going off the rails, Sylvester got his shit together and was ready to be a responsible person again.
The problem was, he was still unemployed and had $1,200 a month in child support that he was ordered to pay.
Tweety did what she could to find a job that paid well but, the economy was the worst it had been since the Great Depression and she had a hard time finding work.
In an effort to make herself more hirable, Tweety decided to pursue a higher level of education than she had and took out some student loans to pay the tuition.
In the meantime, Sylvester found work and started to assess their financial situation and what his credit score looked like.
Unfortunately, each month that Sylvester was only able to pay a portion of his $1,200 child support payment, the credit company marked it as a delinquent account.
Child support isn’t like a credit card company where you can call and negotiate a better rate or a partial payment.
Child support payments are managed by the district attorney’s office and, if you make a partial payment, that is considered having not made a payment at all and it’s reported against your credit.
After five years of paying $1,200 plus an extra $100 towards the “back due balance” of his child support, Sylvester & Tweety were finally caught up and were making on-time payments.
Unfortunately, in order to make those full payments plus the little extra for the back balance, Tweety had to defer her student loans and thousands of dollars of interest had accrued.
Sylvester & Tweety knew they would like to buy a house someday so, they started focusing on paying off her student loans and improving his credit score.
His score was the easiest and quickest to fix at that point.
After only three years, Sylvester & Tweety were able to secure a mortgage loan for their dream 4BR + bonus room, 2.5BA with fenced yard and two-car garage house!
Well, there you have it.
Three very different stories of people just trying to live life but, running into challenging situations and heartbreaking decisions.
Bad credit isn’t just for poor people.
There are millions of scenarios that, through no fault of their own, lead people to have a bad credit score.
It doesn’t make then stupid, bad with money, or losers. But, it does make life a helluva lot harder.
What happens when you have a bad credit score?
It’s easy to think, “I just won’t apply for any credit cards. I don’t have to pay attention to my credit score”.
But, that couldn’t be further from the truth. Your credit score has to do with a lot more than just that Target card that you want.
Buying a house
Obviously, if you want to buy a house, having a good credit score is important. Part of this is because the health of the economy can dramatically change how easy or difficult it is to get a home loan.
When the economy is not doing so hot, banks aren’t exactly jumping at the chance to loan people money. So, those folks who have a better than good credit score are the only ones who will be buying a house.
Also, once you do finally get the loan, the amount that you are paying in interest on that loan is directly related to your credit score.
Did you know that some companies run your credit to help determine your car insurance rate? You could be paying a higher rate per month for your insurance policy simply because of your credit score.
The whole “getting a job” process can be extremely stressful. First, you have to submit a resume and wait around until the phone rings.
Then, you have to go for the interview and hope they don’t notice your pit stains. Finally, if you are offered the job, there are the background check and the drug screening.
Depending on the company policies, that background check could include running a credit report. If your credit score is bad, they may rescind the job offer!
Renting a Home
If you’re not in the market to buy a house, renting a house is always an option … unless your credit score is bad.
Renting a home with bad credit is not impossible. But, it definitely reduces your options and it can cost you a lot of money.
Most property management companies have certain criteria that a new renter has to meet. Those criteria will usually include a minimum credit score.
If you don’t meet that criteria – they may just opt not to rent to you at all. Or, they may agree to rent to you on the condition that you pay a higher deposit.
That deposit could be in the thousands!
What goes into figuring out your credit score?
Okay, so obviously your credit score is pretty important to making life a little bit easier. But, how is the damn thing calculated?
Obviously, NOT paying your bills has a big impact on your score. But, what else contributes to the overall picture?
Credit Diversity – 10%
This means how many different types of accounts you have open. For instance, if you have all credit cards and no auto or home loans, your credit diversity score will be low.
New Credit & Inquiries – 10%
Each time your credit is “run” – this counts against your credit score. The reason is, the credit companies figure that if a business is running your credit, it is probably because you are applying for a new credit account. Some companies will do a “soft pull”, which won’t count against your score. So, it’s important to ask before giving permission for your credit to be run.
Age of Account – 15%
This is basically how long your accounts have been open. For instance, if you have seven credit cards that have all be opened for less than six months, that doesn’t look good. But, if you have seven credit cards that have been opened for 16 years, creditors can see that you are a responsible person because all of your accounts are in good standing
Account Balances – 30%
Your account balance is how much money you owe and how much credit you have available. For instance, if you have a total of $50,000 in credit available to you but, $48,000 of that is spent – your credit score is going to be very low.
Payment History – 35%
This is the biggie. If you have several years of credit history that shows on-time payments, no collection accounts, and no missed payments – your credit score will be stellar.
How should someone work to improve their credit?
I totally get it. Thinking about all of those accounts that are past due and the one that went to collections being nearly half of your total credit score is overwhelming.
Repairing your credit might seem completely impossible.
But, trust me, it’s not. Here are some tips for improving your credit score:
- Monitor your score so you know what is impacting it each month. Checking your own score does not count towards it.
- Make a plan to pay down your balances and reduce your utilization. Pay off the smaller balances first.
- If you have bad debt on your report (bills that you haven’t paid) – make a plan to pay them
- Pay the minimums on your credit cards before their due dates
- Don’t give permission for any business to run your credit until it is absolutely necessary
Where to turn for help
There are many services out there that can help you get your credit house in order.
Here are just a few that you can look into
This is a free service that you can sign up for and it will provide you with access to your credit report and credit score. Another cool thing is that Credit Sesame will give you recommendations for what they think you should/could do to improve your credit score.
This is a service that you pay a subscription for. Then, you set up your Pay Down My Debit account to automatically deduct money from a specific account on a bi-weekly or bi-monthly basis to pay towards your loans. The idea is, you’re setting up smaller but more frequent payments towards your loans, which reduces the principal amount of the loan and saves interest.
Credit Karma is a free service that you can sign up for. You get access to your credit report and credit score without any negative impact on your score. They will also provide recommendations for things that you can do to improve your score.
Another free service to sign up for and get access to your credit score and credit report. They update your information every seven days so, you’re staying well-informed. They also have a very comprehensive blog with a ton of great information on all things finances
This is a paid service and it costs $59 per month. Once you sign up for your membership, they will pull your credit report and go through it line-by-line to find any accounts that could be disputed with the credit agency. Then, they will start the dispute process on your behalf and provide you with a list of things that you can do to improve your credit.
You can’t control the situations that life throws at you. But, you can control how you react to those situations.
If your credit score is less than perfect, so what!!
It’s time to pull your head out of the sand and take a few steps towards improving it so you can live with less stress.
I mean seriously, how many of us need MORE stress in our lives!?!