By Mory Brenner, Esq.
What Is Bad Credit?
Most people with bad credit think their credit reports tell a story of bad credit and they accurately understand the situation completely. Other people may not realize their credit already started tumbling. In a surprising number of cases people think their credit lies in gutter with ratings like bad, poor, low, horrible or worse, yet in reality they still possess an excellent credit score. Let's look at what is considered bad credit.
Easy examples include people with recent bankruptcy, foreclosure or credit card charge offs. These things give you bad credit when they happen. After a bad credit event as just described a person's credit takes a sudden and serious hit. Let's take a moment, however, to look at how time effects bad credit. The first thing to understand involves the laws governing the credit reporting bureaus. Most standard credit items must fall off or your credit report by law after seven years, a chapter 7 bankruptcy after ten years. Certainly errors happen and when they do you can remove them yourself or hire a credit repair professional to help, but contrary to what some people think, bad credit does not haunt you forever.
Those bad credit events like foreclosure and bankruptcy came as obvious one, but exactly how late does a late payment have to get before your credit score sees a decline? In most cases nothing records as a bad credit event until you reach the 30 day past due mark. Many people worry when they miss the due date their credit is ruined, but they worry too soon. Even when a mortgage payment reaches 20 days overdue and the bank imposes a late fee, a bad credit event has not yet happened. I recently consulted with someone who has been making their mortgage payment about 28 days late for months, just barely avoiding the 30 day late mark. They started off convinced their credit score was so bad it might even have fallen below 500. I had them go online to obtain an accurate credit score and they found to their amazement a credit score over 700.
Accumulations of events certainly add up. A stack of credit cards all running 30 or 60 days late can work together to bring a credit score down to the level of someone with a bankruptcy, and this accumulation can have the same effect as a major bad credit event. I often field questions about the degree of a bad credit event or comparisons between bad credit events, like which is worse for your credit, foreclosure, a deed in lieu of foreclosure or a short sale? For most situations I find the whole question irrelevant. If you fall off a cliff how much does it matter if the cliff stands 210 feet tall or 230 tall? For example, let's say someone with a 710 credit score loses their job, stops making mortgage payments and faces forclosure. Hypothetically say a short sale drops them to a credit score of 525, a deed in lieu of foreclosure puts the credit score at 510 and a foreclosure sale pushes the credit report down to 490, Those scores will all be considered very bad and almost no one will care exactly how bad is bad or if a credit score looks just plain bad or very very bad. The much more important topic revolves around not exactly how far your credit fell but what you do after the bad credit event to rebuild your credit.
I'll pause here for a moment because I know many readers want me stop and give them some firm number that clearly defines what is bad credit by some universally accepted standard. Well, no such thing exists. Some banks may say a credit score of 679 just falls shy of good, but they would reject any applicants at that level. Other lenders might call a credit score of 550 still good. To get an idea of what is bad credit you need to look at things in the same way. For some lenders anything not excellent might just as well be bad, and for others used to seeing bad credit even a 500 might be thought of as fair credit. What is a bad credit score emerges as one of those age old questions where beauty is in the eye of the beholder. If I must write a number I would answer the "What is a bad credit score?" question by saying once you get below a credit score of 550 you should be concerned and once a person drops below 480 you no longer need to wonder what is bad credit, you've got it for sure.
Let's look a bit deeper now at what constitutes a credit event, or an entry on a personal credit report. Mainly a credit score involves the items you expect like bank loans and credit cards. Beyond that you need to see a copy of your credit report because not all businesses report the same way. Depending on if your payment history was good or bad this might be either a positive or negative for you personally. In this category look for transactions like utility bills, telephone bills including cell phones, local store accounts and rent payments. In most cases good payments will not end up on your credit report and help your score, but if bad payments get to the point of a charge off or the account ends up in court the likelihood or finding a bad mark on your credit report increases.
I suppose in that comparison bad credit comes out as a nice option because no matter what happens people can not die from bad credit, and no level of bad credit leaves a person permanently entrenched in bad credit. How long it takes to rebuild good credit after a bad credit event depends on how aggressively the person with bad credit tries to gain their good credit back. Doing nothing to improve credit from a state of bad insures long term bad credit. While time erases previous bad credit if enough years pass, doing nothing to rebuild credit just brings a person to a state of no credit when all of the bad credit events fall off of the credit report. People putting a great deal of effort into improving their credit will find only 6 months to 2 years allows them time to get their credit back up to a very respectable level.
To move away from a position of bad credit you should learn everything you can about credit scores and how they work. From there you may want to read up on the basics of credit rebuilding and proceed to either professional credit repair help or a free credit repair course or even do it yourself. Fixing your bad credit rates as a key part of your life, exactly which path you take does not matter quite so much, select what you find the easiest and most likely for you to see the process through to completion. Debt and bad credit may weight heavy on your mind, but you need you get past the feelings that come with debt or bad credit and start to deal with the important issues. With some effort you should see your bad credit become a less important part of your credit score and your overall credit rating improve soon.