credit score scale

What is Bad Debt

Bad debt is paying interest on something that has no lasting value, pure and simple. For example, using a credit card to purchase a television and planning to pay it off in four or five months would be bad debt.

In the same way, purchasing a house with a thirty year loan is also bad debt. If you look at a loan chart you will see that it takes years (over fifteen) before you are paying more on the principle than on the interest. So unless you stay in the home for a very long time you will owe almost as much on the loan when you sell the house as when you bought it.

It's for that reason that it is actually smarter to rent until you have a large amount of the home's price saved up, and then get a ten or fifteen year loan. Renting a home or apartment for $600 or $800 a month (rental amounts vary according the area, of co
Britt Phillips - Making Serious Money Requires Serious Effort

urse) will allow you to save money a lot faster than having a $1,000 a month mortgage plus all the other expenses that come with owning a house (higher utilities, yard expense, repair bills, property tax, etc.).

What if You Have Bad Credit?

If you have bad credit and want to get a credit card, it's a good idea to limit the number of inquiries to your credit report to help keep your score from dipping even further. To do that you need to research the credit cards and decide which cards you'll have the best chance of obtaining before you fill out any applications.

Typically, cards for bad credit will carry much higher interest rates than the prime credit cards available on the market - but there are benefits associated with having a credit card despite the higher interest rates. But be careful of how much you put on the card each month and pay the card off when the bill comes.

Debt Reduction

Debt reduction credit card consolidation is offered by money lending firms who bail out the people neck-deep in debts. What makes debt consolidation appealing is that various companies offer a combination of several debt reduction and credit repairing plans which aim to completely obliterate a person's existing debt.

Secured Debt Consolidation Loans

Debt consolidation loans may be classified into secured and unsecured loans. Secured loans are loans such as home equity loans. Secured loans are easier to get than other forms of borrowing because the loan is secured by tangible property.

Home equity loans are collateral loans, in which the loan is secured by a home's equity. Although secured debt consolidation loans offer many benefits like large loan amount, longer repayment period and above all the low rate of interest, it still has one big disadvantage attached to it. That disadvantage is the collateral that could be taken from you if you fail to repay the loan. For instance, several missed payments could result in foreclosure of your home.

Unsecured Debt Consolidation Loans

There is no fear of the collateral being lost through non-repayment of the unsecured debt consolidation loan. Unsecured credit card debt consolidation requires a borrower to furnish proof of his sound income and financial standing, if any. The interest rates are usually higher than for a secured debt consolidation loan.

What to do if You Find Yourself Deep in Bad Debt

First, stop spending and reduce your monthly bills as much as possible. Do not buy any more items that are not absolutely necessary. Instead of purchasing $150 shoes for yourself or your child, purchase $15 shoes.

Second, start paying off the smallest debt first. Then, as you pay off each credit card or loan, use that money that had been going for that debt to start paying off the next smallest debt.

For example, if you have an $8,000 credit card debt and a $2,000 credit card debt, pay off the $2,000 debt first. Then use the money that had been going toward the $2,000 debt to pay off the $8,000 debt.

Of course, while you are putting every extra cent you have toward that lowest debt, you are paying the minimum amount due on the other debts. If your income is so low that you cannot afford to pay the minimum amounts on the debts, you definitely need some professional help from a trustworthy debt counselor.

Depending on the amount of debt it might take a number of years to pay every outstanding debt. But paying off the smallest debt first and then going to the next biggest works better than trying to pay off the largest debt first, or trying to pay them all off at the same time. So get started. The sooner you start the sooner you get out of debt.

Carol Stack

www.cambridge-credit.org -- As we enter the New Year, just about every financial and economic expert has offered predictions for what is to come. Predictions for 2011 run the gamut from a complete financial turnaround to more trouble ahead. So, what exactly will the year hold? Well, a good deal depends on us. Two-thirds of our economy is based on consumer spending; therefore, we have to become comfortable spending our earnings before the credit and employment markets can thaw -- a change in attitude that may be easier said than done. Watch this week's webisode from Cambridge Credit Counseling Corp. to learn more. Host: Community Outreach Director, Thomas Fox.

Sure, the economy may be flailing, but learning to preserve and maintain your creditworthiness and improve your credit score is still extremely important. If you've spent any time watching or reading the news, you're aware that bad mortgages obtained with faulty credit lending practices and other flawed methods have sent the economy into a tailspin.

Creditworthiness is defined as being financially established to the point where lending credit is deemed a sound judgment by a bank or financial institution. Your credit score determines many things - if you're responsible enough to re-pay a loan on time and not default as well as your experience handling lines of credit and interest rates. In the eyes of a financial institution, your creditworthiness will help you acquire a loan for a car, house, or other large asset much easier.

The Dynamics: Maintain and Improve Your Credit Score

Developed as a mortgage tool in the mid 1990s (1), your credit, or FICO (R), score essentially determines what, if any, loans you are eligible for and the amount of interest you'll be required to pay. As your score decreases, the rate of interest increases. Credit companies often say that timely payments are perhaps the most important factor to foster and continually improve a credit score that is high or within an acceptable range.

Your credit score is broken down into many factors: 35% is your payment history; 30% is the current amount you owe; 15% is the time you've had your credit lines open and active; 10% comprises new credit lines; and the remaining 10% is the type of credit you use (2). If you've fallen behind on payments and the amount you owe is increasing, your creditworthiness (in the eyes of the lending institutions) may be floundering.

Send Away for Your Credit Report - for Free!

Are you interested in seeing what's on your credit report and determine your creditworthiness for yourself? It's easy to get this information. Simply write a letter stating that you wish to receive your credit report from the three following credit reporting agencies, and you'll be mailed your report free of charge when requests are made once within each year. Please note that there is an additional fee to obtain your credit score from the credit reporting agencies.

• Experian, www.experian.com: receive your credit report free of charge by visiting the Experian website; requesting a copy by writing to P.O. Box 2002, Allen, TX 75013; or by calling 1-888-397-3742.
• TransUnion, www.transunion.com: request a copy of your credit report by writing to P.O. Box 1000, Chester, PA 19022 or view your report online with a free trial subscription. You can also call the credit agency at 1-800-888-4213.
• Equifax, www.equifax.com: write a letter of request to P.O. Box 740241, Atlanta, GA 30374 or call 1-800-685-1111 for more information. You can also view your credit report online with a free 30-day trial (3).

Knowing the dynamics of and working proactively to improve your credit score will help you boost your creditworthiness and perhaps even protect you from identity theft or credit fraud. And, if the numbers on your report are less than favorable, there are ways to improve your credit score further.

How Lenders Judge Your Ability to Re-pay a Loan

If you receive your credit report and there a few items on it that you are less than happy with, you do have some recourse in the situation. Most of all, however, do not pay someone to help you out of your mess. A credit counseling agency will offer advice on how to improve your credit score and boost your creditworthiness but will charge you extensively for this information. Basically, working to improve your credit score and fostering creditworthiness is a three step process: 1. Request and review your credit report from multiple agencies; 2. Pay in full your overdue accounts; and 3. Open new lines of credit, starting slowly with either a pre-paid or unsecured credit card.

When lenders or creditors pull up your credit report, they apply the word 'risk' to the situation. If someone with a low credit score is looking for a home loan, a lender will likely view this individual as high risk and perhaps deem him unable to re-pay the loan in a timely or even responsible manner. However, lenders will also consider your current income, occupation, and the amount of credit you need.

If you're reviewing your credit report yourself, the following scale will come in handy:

• Below 550 to 599: Your credit problems need to be addressed. Lenders and/or creditors consider these credit scores to be terrible.
• 600 to 649: Within this range, you will have trouble finding loan approvals and you may receive poor interest rates. Lenders will consider you to be high risk.
• 650 to 699: While close to 700 is considered healthy, as you get closer to 650, the tables begin to turn. A score of 650 is not great but is considered average. You need to think about a course of action to improve your credit score.
• 700 to 750: Anything between these two scores is considered financially stable and you will receive the best interest rates.
• 751 to 850: While 850 is the highest on the FICO scale, the high 700s are ideal and are considered the least risky for lenders. Your creditworthiness is considered quite high.

Creditworthiness Means Heightened Diligence

Poor credit can really come back to haunt you. That's why diligence in making your payments on time and regularly checking your report to improve your credit score or maintain your creditworthiness are two of the most important things you can do to ensure you remain in balance financially.

Ultimately, your credit determines what loans you are eligible for, and if you have less than spectacular credit, you may have a hard time securing a loan for a car or a home. And if you do receive that loan, the interest rates will kill you in the long run. A little diligence goes a long way - work to improve your credit score and lenders and/or creditors will help you embark on your path to financial health and stability.

Sources

1. http://www.privacyrights.org/fs/fs6c-CreditScores.htm
2. Ibid.
3. http://www.fightidentitytheft.com/credit_bureaus.html

Darrel Giann