Bad credit: Easy to get, easy to lose

Roger Schlesinger
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Posted: Sep 07, 2006 7:13 AM

Strange titles usually lead to even stranger stories, but hopefully not this time. Bad credit and home ownership are an oxymoron. If not yet in your case, it will be very soon. Before you react and email your thoughts to me, let's look at the causes of bad credit and some of the surprising things that can happen to you.

If I were to take a poll, the number one answer to the question “What causes bad credit?” would be late payments. To some degree this is correct, but in many cases it isn't.

In fact, the old thoughts you have about bad credit should be expunged from your mind, as most of them aren't as true as they use to be. Other causes of bad credit are collections, judgments, bankruptcies, foreclosures, charge offs, tax liens etc. And would you believe that too much credit (even if the payments are on time) -- too many open, but unused accounts and too many accounts with balances too close to the high credit limit should be added to the list? They can cause a lower credit score as easily as the public records I cited.

Credit is an unusual indicator because it is fluid. Most people will tell me their thoughts on their credit and be fairly close, but others will be way off. In this modern world, we have modern problems such as identity theft, transposed numbers, similar names and simple incompetence, all that can change your credit dramatically. Many years ago, I myself had my social security number changed, accidentally by my accountant, which caused havoc for years, especially with the IRS. A client of mine just traded in his car and bought another one from a reputable dealer but found out that the dealer forgot to pay off his trade. The car was reposed and my client’s credit score fell dramatically. It is still being rectified.

We as a nation have moved to credit scoring, which is a problem unto itself. The way we in the mortgage industry use credit scoring is to have three credit bureaus send their score for the borrowers, and we take the middle score of the three. I do not wish to get into a discussion about credit scoring now, but I will simply say it is something we have to live with and we do our best to make sure it is correct.

Now let's look at the reality of the above-mentioned problems and see if you can find a ray of sunshine in my explanations. I will start by stating that great credit is a score over 700, good credit is 680 or higher, okay credit is 620 or above, poor credit is around 565 and above, bad credit is at 500 and up, and below 500 is a problem.

DO NOT BEAT YOURSELF UP OVER MY GRADING SYSTEM. JUST TAKE STEPS TO IMPROVE YOUR SITUATION.

The major mistake most people make is accepting a 30-day late because you were assessed a late payment. Late payment assessments come generally between 10 and 15 days after the due date, but a 30-day late is 30 days after the due date. If you have any on your credit report and you weren't actually 30 days late making the payment, challenge it and get it off.

A current 30-day late can cause you up to 100 point drop in your credit score!

People who have a moderate amount of credit outstanding and make payments on time can have a lower credit score because they have all or most of their balances too close to the high limit. A balance of $12,000 on a credit card with a high balance limit of $15,000 is too close, and will work against you. Sometimes it means pulling some money out of one source and paying down the balance on other accounts. At this time I must always point out that I am not suggesting you borrow your way out of debt. I am telling you that if you are seeking financing for any reason, it is best to rearrange your accounts if they are in the state I’ve discussed above, to help you get you a better score and ultimately a better interest rate.

I have seen borrowers with good credit scores coming out of a Chapter 13. The reason is that all accounts were brought current under the Chapter and not wiped out.How you treat your creditors carries a lot of weight. When you finish with a credit card or other creditors, be sure to close the account. The credit bureaus will look at open and unused accounts as potential credit for the borrower, and it will work against you.

Now for the main point: If you have a house, you can't have bad credit, unless there isn't a penny of equity in your house. Credit is expensive and bad credit is an unneeded additional expense. Clean up your credit and you will find the lower interest rates you will receive with good credit will be a financial windfall. I would take all of the equity out of my house to clean up my credit before I would live another day with huge interest rates on other outstanding obligations. Many will disagree, but that doesn't make me wrong and them right. Sit at my desk and read the emails from people who didn't act when they could, and you will see what I mean.

Once you take cash out of your house or other real estate or financial assets, you can change your credit in a matter of a few weeks to a few months. If you do not have any assets to tap, it isn't as easy. The road back for you is not to avoid the creditors, but to contact them and try to work something out that you can live with. Don't agree to something you can't make happen just to get them off your back. A dollar a month paid on time is far better than a hundred dollars that is promised and not paid.

Good credit is a blessing, which you can bestow upon yourself. Do not hesitate to do it. An unscientific but widely held belief, by me, is that people without credit problems sleep better than those with credit problems. They also look better and dress better, but do not necessarily have more hair.

Roger Schlesinger's Mortgage Minute is heard on hundreds of radio stations and daily on the Hugh Hewitt radio show and Michael Medved shows. Roger interacts with his hosts and explores the complicated financial markets in order to enlighten his listeners and direct them along their own unique road to financial freedom. Roger is the President and founder of Manhattan West Mortgage.