Bad credit should not be a source of embarrassment, and those with it are far from alone. “The stigma that sort of goes along with bad credit, we don’t feel it should be there,” said Rob Anderson, co-founder of Livingwithbadcredit.com, an education Web site for people with credit problems.
“It’s not something to be shameful about because of the lack of education that’s been out there for the last 20 years.”
Thirty million Americans are living with marginal-to-poor credit, and that number is expected to swell with the increasing number of consumers falling behind on their subprime mortgages.
“The embarrassment and the lack of knowledge that went along with having bad credit sort of forced people into borrowing positions and home finance positions that were not in their best interest because they felt like they couldn’t shop,” Anderson said. “They felt rejected.”
Most people find out they have bad credit when they are turned down for a loan, said Mike Sullivan, director of education for Take Charge America, a Valley-based, nonprofit credit counseling agency.
Most consumers have the power to improve their credit in a relatively short period of time, he said.
“I tell folks that it’s probably reasonable to think that you could improve our credit score by eight to 10 points a month,” he said. “You can improve your credit score pretty rapidly by paying your bills on time and not taking out new loans.”
FIND OUT NOW
Bad credit not only limits access to affordable debt, but can disqualify you for employment, housing and affordable insurance.
“The better your credit, the lower your overall costs will be for many different things that we normally do every day,” said Neal Van Zutphen, a certified financial planner with Delta Ventures Financial Counsel in Mesa.
Three major credit bureaus — Experian, Equifax and TransUnion — issue individual credit reports on every consumer. There are differences in each of the reports, and the agencies do not exchange information unless required by law.
Each report includes all credit accounts and outstanding loans, and bill paying history.
“I check mine every four months,” Sullivan said. “I’ll get a different one every four months. You do need to check it and you do need to notify (the bureaus) in writing about the errors you find because you probably will find errors.”
Nationally, the average credit score among the three bureaus is between 675 and 678, Anderson said.
“Just because you’re below that doesn’t mean you’re below average or that you have bad credit,” he said. “Experian ... says that marginal to poor credit is anything below a 600. We say to people that if you have below a 678, you could potentially be paying a higher interest on something. You might be paying 6.9 percent as opposed to getting the 3.9 percent on an auto loan or something along those lines.”
Credit scores around 600 are “very bad,” Sullivan said.
“The last thing you need to do if you have bad credit is to borrow money, and yet that’s what a lot of people do,” he said. “Yeah, you can borrow, but it costs you more and you’re likely to be in trouble in a hurry.”
WHAT HURTS THE MOST
Outside of filing bankruptcy or becoming a victim of identity theft, the most destructive actions in terms of your credit score are paying your bills late and accumulating too much debt, Anderson said.
“Thirty-five percent of your credit score is comprised of your credit history, meaning how well and how timely you paid back debts,” he said. “You have to pay everything on time. If you haven’t been paying on time, that’s something you can address going forward.”
Another 30 percent of your score is how much you owe in relation to your credit limit, Anderson said.
“The best way to maximize your score is to have your amount owed or your amount of indebtedness around 25 percent of your overall credit limit,” he said. “If you owe $10,000 and you have a credit limit of $10,000, ... they’re going to predict that you’re going to fall behind soon, incurring late charges and (other penalties). You just aren’t painted in a very good light with the credit reporting agencies when you’re maxed out.”
The quickest way to see your credit scores climb is to always pay on time and pay more than the minimum payment so your debt goes down, Anderson said.
“Take your credit cards and rank them, and the one that has the higher interest rate, pay the max over that minimum that you can, and go down from there,” he said. “Create a snowball effect for yourself.”
If you’ve fallen behind and are having trouble paying your bills, it’s important to communicate with your creditors, Van Zutphen said.
“It’s far better to take control of it and be proactive to attempt to cure the issue than it is to try to avoid it or run away from it,” he said. “That just makes your credit worse because ... you end up with collection agency calls.”
Tips to improve credit
Rebecca Warren, a certified financial planner professional and certified senior advisor in Mesa, offers the following tips for improving your credit:
• Start with realistic budgeting to get your finances under control.
• Someone who owns a home can consider debt consolidation, such as a second mortgage or home equity line of credit.
• If that doesn’t work or help you catch up, contact your creditors to work out a repayment plan.
• If you can’t stick to a budget and can’t work out a repayment plan, try working with a credit counseling organization. Ask your bank, credit union, college, friends or neighbors for a referral.