Like it or not, and despite the financial guru’s claims, credit plays a critical role in your financial life. Maintaining good credit is essential if you’ve already worked hard to establish it and is vital if your credit history has become tainted or “bad.” But what IS “bad credit” exactly?  The first step to getting your credit back on track to know what causes bad credit in the first place.

The Causes of Bad Credit

Every entry in your credit file can be either positive or negative. A positive entry reassures a creditor that you’re likely to pay back money loaned to you. A negative entry indicates that you may not pay back the debts you owe.

Patterns of Bad Credit Behavior

A single negative entry can cause your credit score ^[2] to fall but won’t always hurt your credit score ^[2] enough to give you “bad” credit. But a pattern of negative entries will definitely result in bad credit. What does a pattern look like?

• Frequently late or missed payments on loans or credit cards: Creditors will hesitate to lend to you if you show a history of missing payments, making late payments, or making payments that are less than the minimum due.
• Too much outstanding debt: Creditors will hesitate to lend to you if the total debt you’re carrying seems likely to hamper your ability to repay any new credit. They wonder why you need more credit when you’re already up to your eyeballs in debt.
• Too much available credit: Having more credit than you need, such as multiple credit cards ^[3], even with zero balances, can hurt you. Why? You could be suddenly in debt by a very large amount before any one creditor could react to lower your limits.
• Too much credit: Too much can suggest to creditors that you may be reckless with credit or that you might be shifting your debt back and forth between credit cards ^[3] to make your payments (the old paying your Visa with your MasterCard trick). Just applying for too much credit will negatively affect your credit.
• Lack of credit history: Though it may seem unfair, creditors will hesitate to lend to you if you have very little credit history—even if that history contains no negative entries. For that reason, it’s a mistake to avoid using credit simply to keep your credit history clean. Instead, do use credit—but do so responsibly.

Serious One-Time Credit Issues

Though a single missed payment on your credit file won’t destroy your credit, certain financial difficulties and credit events are so serious that the appearance of just one will have a major negative effect on your credit.

• Bankruptcy: A legal declaration of your inability to pay debts to creditors
• Charge off: A creditor’s decision to give up on recovering debt you owe because you’re unable to pay
• Collection action: A creditor’s decision to sell or outsource the collection of your debt to a debt collection agency ^[4]
• Wage garnishment: A process in which a creditor obtains, through a court order, the right to take part of your salary directly from your employer in order to make up any payments you may owe
• Tax lien: A government claim on your property for the amount of unpaid state or federal taxes
• Foreclosure: A legal process in which the grantor of a mortgage ^[5] takes possession of and sells the mortgaged property after the borrower fails to make the required mortgage ^[5] payments
• Repossession: The forced surrender of property following a borrower’s failure to make payments

What to do if YOU have bad credit?

There are two main cures for bad credit:

• Time
• Timely payments

Credit scoring models are more interested in the recent than in the distant past and if you have bad credit from more than 5 years ago, there isn’t a lot you can do about changing it. Time will eventually remove it from consideration.

Timely payments can do a great deal to improve your credit ratings. Making on time payments is the BEST way to dig yourself out of a bad credit hole. Sometimes, however, we need help. I personally used a credit counseling service back 16 years ago and it was the best decision I ever made.

If you’ve realized that you’re in over your head and need some help sorting things out, consider trying GoLookOnline.com ^[6]. There you can get a free credit repair consultation and get coaching to help you learn how to raise your credit score. Some people have reported a 100 point gain. Though your results may not match those, getting help is sometimes the best first step in turning things around.

About the author

Ron has written 1083 articles on The Wisdom Journal.

The founder and editor of The Wisdom Journal ^[7] in 2007, Ron has worked in banking, distribution, retail, and upper management for companies ranging in size from small startups to multi-billion dollar corporations. He graduated Suma Cum Laude from a top MBA program and currently is a partner in a national building materials company.

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