Poor Credit, bad credit, ruined credit, call it what you will, it’s not good.
If you are living perhaps a little too close to the edge (spending more than you make, and living on credit) you can benefit by learning what pitfalls you should avoid to keep from ruining your credit and you can start now to change your financial habits.
If your credit has already been compromised, you can learn from your past mistakes and implement changes in your life to regain financial security and improve your bad credit rating.
Why You Don’t Want Poor Credit
When we take out a loan, we are giving our word to pay it back.
This is true whether we are a stay-at-home mom living from paycheck to paycheck, or a businessman buying a million dollar yacht.
Bad credit affects every class of American, be they low income families living under the poverty line, or upper middle class, highly educated professionals.
This “disease”, if you will, knows no boundaries.
It may sound like a cliché, but our word should be something people can trust, and if we lose that trust it can take a long time to regain it.
In the meantime, we may experience feelings of guilt and shame, damage to our self esteem, and ethical or religious concerns.
We also have to consider the impact our actions have on our children, as they look to us for the right example of how to live their own lives.
If we cannot follow through on our commitments it will be difficult to teach them to be honest, upstanding citizens. Children are very quick to spot hypocrisy.
Failure to repay a loan can have disastrous financial consequences, and can lead to further problems down the road if steps aren’t taken to rebuild bad credit.
The Consequences of Bad Credit
If you have bad credit, you lose any chance of getting reasonable interest on future loans. Good credit institutions will not want to take a chance on lending to you because of your poor credit history (loss of trust), and bad credit lenders will try to take advantage of you by charging astronomical interest rates.
A Bad Credit Story
During my pre-stay-at-home-mom days, I worked as a bank teller. One of our sister companies had an office next door. They were a high risk lender who would often lend money to individuals for inexpensive cars or convenience loans that they claimed helped establish or rebuild credit.
One of the lenders who worked at this high risk loan company would come into our branch and brag about how he would tell his customers that their interest rate was “only 3% per month!”…thus distracting them from the fact that the annual interest rate was 36% per year.
He claimed that most customers would never do the math and realize that they were paying back 1/3 of their total loan amount in interest each and every year – or that a three year loan would mean paying back double what they had borrowed!
Though he thought this was a funny thing, it used to upset me to know that there were those in such a bad situation that they had no choice but to deal with the likes of this lender.
Once you have bad credit, you will have difficulty getting a loan for a home or even with renting a place to live. If you wish to lower the interest rate on your home, you may find that it is almost impossible to refinance with bad credit; most banks will not even consider a proposal for refinancing with poor credit.
Getting a car loan will be difficult as well, and auto insurance rates will be much higher if you have bad credit. Poor credit can even result in being turned down for employment in some fields. Your options can be severely limited if your credit (i.e. your word) is not good.
It’s amazing who checks your credit nowadays. The following fields base their decisions on credit; if yours is not good you can either be denied or pay a much higher rate:
• Any type of loan
• Home or Apartment Rental (may not qualify)
• Employers (to get a job)
• Auto Insurance (to qualify for insurance)
• Cellular Phones (to qualify for a plan)
• Utilities (your local electric company, etc)
• Direct Sales Companies (to start a home business)
• Banks (to open an account)
Unfortunately, the list of companies that will check your credit in order to do business with you will only grow with time. If your credit is poor, it will haunt you everywhere, regardless of if you need a traditional loan.
Payday Loans or Cash Advances
Payday loans are presumably designed to help people out by advancing a percentage of their average paycheck if they are short of funds between paydays.
These companies charge exorbitant fees, often $15 to $20 per $100 borrowed for a two week period.
This is an annual rate of over 400% per year.
The main flaw in the payday loan concept is that if you don’t have the money this week, you probably will have trouble coming up with it next week, too.
Most payday loan revenue is generated by repeat customers, taking out larger and larger loans to cover their rapidly growing fees.
This creates a vicious cycle, with payments on notes running into hundreds of dollars added to an already strained-to-the-limit budget.
The situation can rapidly snowball as additional loans are taken out at similar institutions to cover the original loans and even more interest and fees.
Eventually the cycle breaks down as the bills become overwhelming, and the payday checks bounce, ruining the customer’s bank account and further damaging their credit.
No matter how smart those who choose to take out payday loans think they are, or how good their intentions, payday loans or cash advances can swiftly and significantly grow out of control.
Never, ever, ever, under any circumstances take out a payday loan. Never.
A variation to this type of bad credit loan offers a secured loan in exchange for the title to your vehicle. This basically amounts to pawning your title, and leads down the same path as the other loans, with the added risk of losing your vehicle at the end of the road.
Families with poor credit are especially vulnerable to this type of scam when groceries are running out, or they need diapers, formula or other items for their children.
Because emergency cash options are limited for those with poor credit, these cash advance stores prey on those with bad credit, who are like sitting ducks when disaster hits.
A much better if more humiliating solution is to check with local churches or community services for help with these items – most of the time you can receive a donation of these types of goods and avoid borrowing cash.
Reclaiming Your Financial Dignity
If your credit has already been compromised, start taking steps now to rebuild your poor credit. Live within your means, using a cash accounting system to pay your remaining bills on time. Implement a strategy to save money and eliminate debt.
If you are living on a cash basis, make sure you check out the budgeting page for tips on reducing your expenses.
Also, I highly recommend using a cash based system such as Mvelopes, which will help you get back on track. You can get a free trial month below. I personally use this system and recommend it to everyone.
If you currently have bad credit, don’t take out any more loans, or rely on credit to pay your bills and living expenses. By repaying your debts and learning to save and budget your money, you can teach your children to follow your upright example and always honor their word.
Eventually, you can get back on the right track towards good credit, and start to qualify for better rates and better treatment in the financial world. But the behavior that lead to the poor credit in the first place needs to stop, now.