What Is a Bad Credit Score?

Your credit score is very important. It is a determining factor in whether a person will get a car loan or even a cell phone line. If a person has a bad credit score, it is not the end of the world. However, it does take time and hard work to improve it.

What Is a Credit Score?

A credit score is a number between 300 and 850 that is calculated by different companies or lenders who use their own credit scoring systems for that purpose. Credit scores are also calculated by the three credit reporting agencies, which create a person’s credit reports. The three major credit reporting agencies are Experian, TransUnion and Equifax. A person can have multiple credit scores depending on which company or lending institution calculates it; they may use different formulas for the calculation of credit scores.

A higher number is more positive and means that a person is more creditworthy, i.e. likely to pay a loan back on time as promised in a loan agreement. If a person is creditworthy, they are more likely to be able to borrow money; lenders will believe that if they lend money to the person, they will be paid back.

In the U.S., the FICO credit rating system is the one that is the most commonly used. It develops a person’s credit score based on the information in their credit reports. Again, It helps lenders determine how likely a person is to repay a loan. This, in turn, affects how much a person can borrow, how many months they have to repay a loan, and how much it will cost, i.e. the interest rate that is charged.

Generally, many lenders believe that scores above 670 indicate good creditworthiness. Typically, the higher a person’s score, the lower the risk they pose of defaulting on a loan and the more likely creditors are to lend to the person.

For example, if a person is trying to get a home mortgage loan, the lender will use the Freddie Mac and Fannie Mae credit scoring systems. In those systems, a score below 620 is considered poor, and a score above 640 is good. However, if a person is applying for a loan through the Federal Housing Administration, which helps people with poor credit, a FICO score of 580 may be satisfactory. All credit systems use the same basic idea; a person who pays their bills on time in the amount owed deserves a better credit score.

How Do I Prevent Bad Credit and/ or Improve My Credit Score?

Generally, many of the companies that lend money to consumers think that scores above 670 indicate good creditworthiness. Again, , the higher a person’s score is, the lower their risk and the more likely creditors are to lend to them.

To prevent a poor credit score, a person should not take on more debt than they are able to manage with their income. Then a person should be able to pay their debts on time. If a person pays their debts no more than 30 days late, it is ideal. It is also a good idea to avoid opening and closing lines of credit too frequently.

There are steps a person can take to improve their credit score if it is unacceptably low. Anyone who denies a person credit, housing, insurance, or a job because of a credit report must tell the person the name, address, and telephone number of the credit reporting agency (CRA) that provided the report. Under the Fair Credit Reporting Act (FCRA), a person has the right to request a free report within 60 days if a company denies them credit based on the report.

Some companies may promise to repair or fix a person’s credit for a price, but the fact is that there is no way to remove negative information from a credit report if it is accurate. Mistakes, or incorrect information, can possibly be corrected. But eliminating accurate information that is unfavorable to a person is more complicated and can take years.

If a person has a low credit score, one thing they need to do is add positive information to their report by obtaining credit, but no more than they can handle financially, and making payments on time.

A person’s payment history affects their credit score more than any other single factor on their credit report. According to some reports, it is 35% of a person’s score. So, having several past due accounts on a credit report hurts a person’s score. Taking care of past due accounts is critical to repairing one’s credit score. The goal is to have all past due accounts reported as “current” or at least “paid.” So a person wants to get current on accounts that are past due but not yet charged-off.

A “charge-off” is one of the worst account statuses; it happens when an account is 180 days or more past due. Accounts that are delinquent but less than 180 days past due can be rescued from charge-off if a person pays the total amount that is past due. Keep in mind that the further behind a person becomes, the higher their catch-up payment will be.

If a person has past due accounts, the person should contact the creditor right and ask how they can get back to current on the account. A creditor might be willing to waive some of the late fees or penalties or spread the past due balance over several payments. A person should let the creditor know they want to avoid charge-off, but need help with it. A creditor may even be willing to re-age an account to show payments as current rather than delinquent, but a person has to talk to their creditors in person to negotiate solutions such as these.

An experienced bankruptcy lawyer might be able to help these negotiations. Bankruptcy lawyers are not only for filing for bankruptcy. They are experienced in negotiating with creditors and might help a person repair a bad credit report.

If you pay a charge-off in full, your credit report will be updated to show the account balance is zero and the account is paid. The charge-off status of the account will continue to be reported for seven years from the date of the first late payment. Another option is to settle charge-offs for less than the original balance, but this can be done only if the creditor agrees to accept a settlement and cancel the rest of the debt.

The settlement status will go on a person’s credit report and remain there for seven years. A person might be able to convince the creditor to delete a charge-off status from a person’s credit report in exchange for payment, but this is not easily done. The most important thing is to pay a charge-off in full. While it will not disappear quickly, it will disappear eventually.

It is also critical to take care of accounts that have been sent to a collection agency. A person can pay such an account in full and try to get a “pay for delete” in the process or they can settle the account for less than the balance due. The fact that the debt went to collection will stay on a person’s credit report for seven years based on late payment. But after seven years, it will fall off the report.

By taking as many of these steps as is necessary in a given situation, a person can repair their credit score if it has fallen to an unacceptably low number.

Do I Need a Lawyer?

If you believe there has been fraudulent activity or mistaken information on your credit report, you may need to contact a credit lawyer to help you get rid of the fraudulent or mistaken credit history. Or if your credit score is unacceptably low and you cannot get the credit you need, you may want to consult a credit lawyer for help in repairing the damage and negotiating pay-offs with your creditors.

Also, the lawyer may help you develop a plan to further improve your credit score. It is important in today’s economy to have a great credit score, so if you need help, you are most likely to get the best possible outcome with an experienced credit lawyer on your side.