In high school we were required to read a book by Nathanial Hawthorne called The Scarlet Letter. It is about a woman living in the 1700’s Puritan era that is accused of adultery and forced to wear a red “A" on her clothing when she goes out in public. This branding was a manner of labeling her to everyone in the community. Those who saw this red brand would know her personal secrets and steer clear. People today also wear a brand, a label that identifies them with every lender, employer, insurance company and cell phone provider. This label is their credit score.
I counsel with literally hundreds of consumers each year who have very poor credit and I have developed some “Tough Love" guidelines for my clients who want to initiate credit repair and get a second chance. Before I dispense with my advice, let me confide that this article is not intended to offend anyone, but deal honestly with what I believe are the major contributing factors which cause bad credit and the reason people require credit repair in the first place.
The Scarlet Number
In a sense, every consumer today is wearing his or her credit score. This 3-digit number tells other people and companies about your history, specifically your credit and payment patterns. You may think that your credit and its high or low rating are known only by you, but its not. It is more likely that more people will know about your poor credit if your score drops. In the simplistic form, a credit score and the credit bureaus that sell your information have devised a highly effective method that allows the creditors of your past to communicate directly with the creditors of your future, sharing your buying and payment habits. You have been labeled whither you like it or not.
I have bad credit. Is credit repair right for me?
There are literally thousands of articles and a considerable amount of cyberspace devoted to the subject of credit, credit scoring, and credit repair. Asking a credit repair company if you need credit repair is like asking a barber if you need a haircut. The answer will always be "Yes!" I am not in the credit repair business so I feel unbiased in dispensing this information. Credit Repair can be a powerful and effective tool to regaining financial control. If you or someone you know is considering credit repair, please discuss the following before investing any time or money.
The Naked Truth You Need to Hear
Truth One: Credit repair should be part of a treatment of financial recovery. It is not in itself a replacement for good financial habits.
Most credit reports contain a significant amount of errors, usually not in the consumers favor. Chances are that if you have moderate to poor credit, the higher percentage your report will contain more errors. One of the reasons for this is that a single derogator account may be reported to all three credit bureaus. If the account goes into collection, the creditor sells your debt to another agency creating another entry on your credit report. These collection agencies will continue to sell and resell uncollected debts over and over trying to recoup their investment. I have seen one debt sold 5 or 6 times, each time being reported negatively to the bureaus. Multiply that one bad debt times 3 bureaus and your report may have 10 or more negative entrees for the same charged-off credit card. So if you decide to enroll in credit repair, you must do everything possible to prevent further negative entrees. In other words, don’t spend the money on credit repair if you are still past due on accounts or if you have any accounts that are not going to be paid on time.
Truth Two: You need credit.
Your credit score and rating will either open doors or slam them shut. Not using credit will only keep them shut. If you stop using credit altogether and decide to just pay cash, you will set yourself and your family up for a life of problems, personal rejection, and missed opportunity. I tell my students it would be like saying “I have a bad habit of overeating so I am just going to stop eating altogether." Abstinence from using credit wisely is not healthy. Please don’t interpret that I am not saying “having credit" is the same as “having debt." Having lots of debt is also unhealthy. But having available credit and understanding how this available credit positively impacts your credit rating is a critical factor in getting back on the right track. Even if you plan to never buy on credit again, the rating you have will dictate the prices you pay for everything from insurance to houses. In this instance, the poor get poorer and the rich get richer. Which one do you want to be?
Truth Three: Stop stealing.
If you can’t pay for it, don’t buy it. Simply put, buying stuff you have no intention of paying for equates to stealing. Everyday I review numerous credit reports of individuals who stop making payments after the first few weeks or months of making initial purchases. It might be a brand new car or an inexpensive catalog purchase. Our society has become so conditioned to buying without any regard to the manner of repayment of the debt. The “instant-gratification" syndrome is killing people’s credit rating and costing this country billions of dollars. No one wants to be labeled a deadbeat but credit scores and the new technologies creditors are using to track and identify consumers are targeting you as one if you stop making payments right after buying that new television. If you decide to start credit repair, you must stop making purchases that you don’t fully intend to honor with repayment. Don’t repeat the same bad habits of not carefully considering the repayment terms of those new credit contracts.
Truth Four: The Deadbeat label is easy to apply but hard to remove.
Most people in this country with bad credit don’t really know why their scores are so low. They obtain credit, make purchases, and miss a payment and the next thing they know they are getting bills for penalties and late fees. Now they are labeled bad risks. I spoke with one of my clients, William, in Dallas. William missed his Capital Finance payment and was hit with late and over the limit charges. In a moment of anger, he decided he would “teach the creditor a lesson and just not pay at all." The next month the same thing happened and this repeated for the next 3 billing cycles. This juvenile behavior only critically damaged Williams’s credit rating. The creditor sold the debt. William had his "new balance" sold to an outside collection agency that hounded him at home and at work for the next year. William did not teach anyone a lesson but he did end up learning one himself. The missed payments cost him 3 times the original amount to settle the debt and his score dropped over 100 points. In addition to the credit score drop, William's other creditors raised his interest rates and William believes he was denied advancement into a management program due to the embarrassing collector calls he received at work.
Truth Five: It’s easier to maintain credit than repair it.
This old saying rings true with credit. Once you have established good credit, it’s fairly easy to keep your score high. However, once you start falling behind on payments, regardless of their amounts, your score will drop. The damage a single missed payment causes to your rating can be catastrophic. I have witnessed a single late credit card payment of $10.00 plummet a persons score 30 points in just one month, making them ineligible to purchase a home.
Truth Six: Bad credit can be a sickness.
I will probably get emails about this but I personally believe its true. I believe applying for credit and taking out loans that are never paid has become a sickness in this county. I meet with people every week who tell me their sad story of hardship and blame their recent bad credit on what is really a lifetime of bad financial decisions. So in the spirit of “tough love," most of the credit problems consumers face are probably of their making, and not created by situations beyond their control. Many of my clients blame others but the truth is it’s usually because they made bad budgeting choices.
There are some cases of isolated illness/injury or employment issues causing the poor credit rating but its been reported that these type of occurrences only contribute to 27% of those with scores less than 620. If you’re one of the 27%, I give my apology. But the fact is that 77% of those with bad credit did make themselves “credit sick".
This credit sickness will continue to reoccur and cripple a person’s financial life if they ignore the warning signs and continue to blame their credit problems on ex-spouses, creditors, or other parties without accepting their responsibility in their own demise. Once a person come to terms that THEY are in control of their spending habits and financial destiny, they can rebuild and redefine who they are and the credit rating they will have. Unfortunately, playing the “blame game" just impedes the process.
Conclusion
The upside to these truths is that I have seen clients who had scores in the mid 400’s finally say they have "had enough" and decide to change their destructive financial habits. I have seen people turn their lives around in as little as 3 to 6 months. I have witnessed single moms with nothing start over and then find the willpower to take control of their situation and eventually buy their own home. This process of credit restoration begins with honesty and personal ownership of your mistakes. Once completed, the individual can start anew and avoid future pitfalls and problems. There is no situation that time and better planning cannot overcome.
But it takes that first good step.
© 2005 Rentbusters. All rights reserved.
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