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A myth pervades our society that individuals who have filed bankruptcy or developed bad credit will never again obtain a credit card, car loan or home mortgage. Perhaps this myth grew out of truths in prior decades about bad credit or perhaps it continues to exist through inaccurate threats made by unscrupulous credit collectors. The truth: even with the worst credit, even one day after bankruptcy, an individual with bad credit may still obtain a credit card, a car loan or a home mortgage loan.People with bad credit must understand, however, that while the doors to the world of credit are not closed to them they will open to a different place compared to individuals with good credit. One's experience in the world of bad credit will vary based on the degree of their problems. Some issues effect all bad credit borrowers but vary in severity. Interest rates will be higher. While some may be surprised or offended by this the concept is understandable. A rate of interest is computed by taking into consideration the general rate of interest nationwide at the time the loan is made and the specific risk of the particular loan in question. Commonly the prevailing rate of interest in the US is expressed as the prime rate, which is the rate of interest a bank may charge its very, very best customers. Competition results in the prime rate at most banks being the same or within a half a point or less. The current prime rate can be found in any financial publication such as the Wall Street Journal or on the Internet. Other base rates which you may hear used include LIBOR (London Interbank Offered Rate) or a specific treasury bill issued which basically represents a bond for specific term of years issued by the U.S. government. These other rates usually dictate mortgage rates while the prime controls most credit cards and car loans. The next element of credit appears as an addition to this rate, for example prime plus 1% or LIBOR plus 10%. Before even taking one's credit into account these add ons will first be gauged on the type of debt. For example a home equity loan where the creditor receives a security interest in a debtor's primary residence, may bring with it little or no special additional risk. Lenders consider your house the collateral which you most vigilantly protect and thus the debt mostly likely to be paid by a debtor. At the other extreme an unsecured personal loan may bring with it a risk factor causing a lender to increase the underlying rate to prime plus 6% or more. With this in mind we now add the element of bad credit. Interest rates for those with a previous history of bill paying problems will be higher than those with perfect records. Put yourself in the Bank's shoes for a moment and imagine how you would react if two borrowers came into your office, one following the other, for the same loan. One borrower has a long and perfect credit record and the other brings a history of failure to pay bills and even bankruptcy. You clearly would be much more comfortable making the loan to the individual with perfect credit. To make a loan to the individual with bad credit you would want some sort of incentive to put your money at risk; that incentive comes in the form of higher interest rates. Certain high risk loans may not be available to those with severally damaged credit. Creditors at some point do draw a line at the risk they are willing to take and because usury laws restrict the amount of interest that can be legally charged. Loans in this group include unsecured personal loans and many credit cards. While this picture may be depressing keep in mind that a bankruptcy or negotiated settlement actually improves ones credit compared to ignoring debt. The combination of rebuilding your credit and time will eventually bring you back to the world of good credit. In the meantime, plentiful credit and loan options remain available to those with bad credit in the areas of home mortgages, auto loans and credit cards. Armed with the knowledge of how these loans work they can serve you well until you restore your good credit. |
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