Bad Credit Problem

Having a bad credit problem is something we’ve been hearing now more than ever before and it’s a label that no one wants to be given.

Some people would argue that bad credit scores are caused because of too many people living beyond their means and living paycheck to paycheck. Once the economy went south and paychecks were cut along with thousands of jobs being eliminated everything else spiraled downward including personal credit ratings.

I believe not everyone who has bad credit should be considered a bad credit risk.

What I mean by that is some people have gone through serious financial hardship during the recent economic downturn and only because of a job loss or wage cut have they started becoming late on payments or skipped payments or exceeded card limits.

But those same individuals may now be back on their feet with a new employer or maybe have taken on two jobs to make ends meet and catch up on back payments. So, a bad credit problem can be a temporary setback but never a death sentence.

There are also those who moved out of state for employment and had no choice but to walk away from their homes because they couldn’t sell it for what was owed. Some have had job offers out of state but can’t make the leap due to the eroding values of homes.

One man, who requested anonymity, had a job offer in Colorado that he can’t take because he can’t default on his $470,000 mortgage on a house now worth $220,000.

Bad credit is not only affecting consumers who have had job losses or cutbacks but small business owners have also seen their good credit fall to the wayside as well. Declining sales and scarcity of credit has also caused many to resort to using personal credit cards, personal loans and savings.

Now when it comes to getting bad credit personal loans or business loans larger banks have stiffer lending procedures compared to smaller banks, community banks and credit unions. These smaller banks provide more one-on-one access to a loan officer and put more emphasis on a borrower’s character rather than just applying a credit-score model.

There’s a combination of factors that affect your profile in a positive or negative way like payment history, balance chasing, debt to credit limit ratios, new credit, derogatory items, inquiries and so on but one of the key risk assessment tools that lenders use to determine whether you are a bad risk or a good risk is based on your FICO score.

Your FICO credit score can range from 300 to 850 with 720 or above being considered top notch credit. There are also non-FICO credit scores offered by some of the major credit bureaus like Vantage score which was created to compete with FICO but that particular scoring model has not been widely accepted by the lending industry.

Anything below a 680 is considered “sub-prime”, or a bad credit score. So the higher your credit score, the better, especially if you want to apply for a loan or business line of credit.

But, each of the three major credit bureaus records your credit score a little bit differently because not all lenders report to all three credit bureaus. So you want to make sure to leverage your highest score!

A real quick example of this was one of my clients was preparing to apply for a small business loan from his local bank and prior to applying we ordered each of his credit reports and scores from all three main bureaus.

His Equifax file had a 720 fico score while his other two scores were 40-50 points lower. We checked with his banker to see which bureau they pulled from for loan qualification and sure enough that particular bank pulled from Equifax. This allowed him to get approved for a loan with the best available bank rate.

Now keep in mind that in addition to FICO many lenders use their own internal scoring systems as well.

Remember, a bad credit problem is temporary and you can recover from it when you have a personal credit repair plan and a solid strategy.

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Marco Carbajo is a business credit specialist, author, speaker, and founder of the Business Credit Insider’s Circle. He is a weekly columnist for Dun & Bradstreet Small Business Solutions, a business credit blogger for All Business & American Express Small Business and author of “Eight Steps to Ultimate Business Credit” and “How to Build Business Credit with No Personal Guarantee.” His articles and blogs have also been featured in Business Week, The Washington Post, The San Francisco Tribune, Scotsman Guide, Alltop, Entrepreneur Connect, and Active Rain.