Bad Credit now what

Having bad credit is not the end of the world. But it can sure make you wish it was. If you’re laboring under crushing debt, and just can’t pay your bills, it may seem like Armageddon is the only thing that will wipe your slate clean.

However, by understanding how your bad credit happened, you can take control of your financial situation and get back on the road to fiscal fitness. Let’s take it step by step:

Question No. 1: What is “bad credit?”

Answer: Simply put, “bad credit” means you’ve failed to pay all your bills, or consistently failed to pay them on time.

When you default on a loan or don’t pay your electric bill for several months, your creditors can report this to the credit bureaus (there are three major ones: Experian, Equifax and TransUnion). Using an arcane, little-understood formula called Fair Isaacs (after the group of accountants who came up with the formula), the credit bureau uses this information and other financial tidbits they’ve gathered about you to assign you a “credit score.”

If your credit score is below 600 most lenders and financial institutions would think you are likely to default on debt. Hence, you have “bad credit.” This means it will be hard for you to get a loan, credit card or any other type of financial consideration. Or you will get credit at such high rates that you’ll never be able to repay the debt and simply dig the hole deeper. Some employers and landlords may reject you as well.

Question No. 2: How the heck did this happen?

Here are the top three reasons why people get bad credit. First, when you consistently spend more than you earned for a significant amount of time, you wind up financing your lifestyle with credit. Eventually the interest on your total debt becomes so onerous you’re left unable to make the monthly payments. This is by far the most common cause of bad credit.

Second, a divorce or failed relationship can result in leftover debt. While two wage-earners may have incurred the debt, it’s not uncommon for just one of them to wind up trying to pay the debt alone when the relationship ends. Third, illness that leaves an individual, or in the case of a family, the primary bread-winner, unable to work for a time.

Question No. 3: How do I get rid of bad credit?

The answer is simple to understand, but can be very difficult to put into practice. To rid yourself of bad credit you must rid yourself of the debt that caused it. There are a few ways to do this.

If your situation seems really hopeless, and you’re prepared to live with the long-term financial consequences, you can declare bankruptcy as a last resort. You need legal advice to do this and recent changes to federal laws have made it far more difficult for individuals to declare bankruptcy than ever before.

Keep in mind the bankruptcy will remain on your record for many years up to a decade in some cases and will severely limit your ability to get credit in the future. Bankruptcy does not instantly restore your credit status to “good.” While it may alleviate your immediate problem of debt you can’t pay off, it will be up to you to rebuild your credit rating by making wise financial decisions going forward.

Another option is to involve a credit counselor. There are numerous services that assist with this. The counselor helps you create a budget you can live with and helps you negotiate your debt with your creditors. It may be true that most lenders are soulless corporations who don’t care about you, but they certainly DO care about their bottom lines. For their financial statements, it’s always better to get SOME money back from you than nothing at all, so most creditors are open to working out a deal.

Finally, you can try going it alone. Credit experts give some consistent advice for people going this route:

Negotiate on your own behalf with creditors. Ask for lower interest rates, easy payment plans and even reduction in principal amounts.

Pay off the easiest debt first. If you have a credit card with just $1,000 on it at 13 percent interest, and another with $5,000 and 30 percent, pay off the smaller amount first. You’ll get the emotional boost of being able to cross one item off your list of debts. Then you can always transfer the $5,000 to the now clean lower interest card and cut up the higher interest one.

Make a budget and stick to it. Start out with a balance sheet that shows all your income in one column and all your necessary expenses in the other. Be brutal about what is and is not necessary. For example, you need to pay your rent or mortgage and the electric bill. You do NOT need cable television or TiVo.

Recovering from bad credit will require you to rethink how you live and spend. But in the end, bad-credit induced Armageddon can be averted.