With the way the credit system is portrayed in the US, many think of it as though it were an infallible system that only catches dishonest and untrustworthy people who take out loans with no interest in repaying them. However, sadly that is not the case. It’s not hard for good people to get a line of credit which they could easily repay, only to fall on hard times and have their dreams of a good credit score snatched out from under them. Here are the ways in which decent and hard-working people are becoming trapped into bad debt.
Let’s use an example. Joe is a carpenter who gets regular work and has no trouble paying his bills. He decides to get a credit card to pay for a new set of tools that are a necessity for his job. He has a plan for paying off completely in six months. Shortly after receiving the credit card and purchasing the new tools however, Joe learns that he has cancer. He was self-employed, and according to his health insurance policy was not covered. He is expected to pay most of his medical bills out of pocket. Now all of Joe’s spare income must to go to paying his medical bills on time so that he may continue receiving treatment, thus he has no funds left over to pay off the new set of tools. Joe has to stop sending money to the credit card company, and very soon his account becomes delinquent. Joe winds up with a much lower credit score because of something he had no control over.
Reading the Ultra-Fine Print
Many people don’t realize how important it is to read the ultra-fine print when they sign up for a new line of credit. Credit card companies are not responsible for making the terms easy to understand. They are only required to list the terms in the agreement. Understandably people wind up agreeing to things they don’t understand. One way that this occurs is with variable APRs. People are told that they are signing up for one APR at a rate they can afford to pay back. But after they accumulate a certain amount of purchases or accidentally miss one payment, suddenly their APR skyrockets and they have no way of making their minimum payments or paying the cards off in a reasonable amount of time. Variable APRs by themselves are not the problem though. They can be very beneficial to help companies when people do not pay their bills on time or otherwise take advantage of their lines of credit. The problem arises when companies and customers do not clearly communicate. Bottom line if you do not completely understant the terms and conditions of a credit agreement, don’t sign it!
The Economic Downturn
At this point everyone knows that the economy has taken a significant hit over the course of the last few years. Naturally unemployment rates have also been on the rise. Many consumers signed up for credit that they could easily afford to repay before the economy took its turn for the worse, and then were stuck when they lost their jobs or given pay cuts. Everyone should be prepared for emergencies like the loss of a job. But when you are on a budget there is only so much saving you can do, and one of the first things people start to let go when they have an emergency are their credit card bills.
Because of the widespread occurrence of identity theft across the nation many companies are beginning to include identity theft protection when people sign up for a card. At the very least most companies offer this as an extra service to their card holders. But what about those who were victimized before identity theft became a well-known problem? Many who have been victimized by identity theft have been able to regain their losses and stop their cards before any real damage was done to their reputation. But some have not been quite as lucky. Many Americans who had no identity theft protection services when they were attacked were left stranded after thieves racked up massive debts in their names.
One particular heart-breaking scenario that often occurred before the widespread understanding of identity theft was the theft of children’s identities. Identity thieves have ways of getting their hands on newly registered social security numbers of young infants. They then go out and register for credit in the child’s name and are easily able to get credit because of the child’s lack of credit history. The biggest problem that happens in this scenario is that the parents don’t think to regularly check their child’s credit score and the identity theft goes unnoticed for years, often not until the child reaches 18 and starts applying for credit cards or student loans. By this time it is too late to find the thieves because they have long since run through the child’s credit and moved on. The child is then faced with either trying to pay off all the debt, taking expensive legal action, or living with their damaged credit scores.
Account Age and Paying Off Slowly
The length of time your accounts have been open can actually have a negative impact on your credit score. The point of your credit score is to show lenders your level of responsibility and trustworthiness. The reason we try to establish a credit history is so that we can show a long history of making payments on time, signifying to lenders that we are capable of paying back any loans they may give to us. But having an account which maintains a high percentage of debt for a long amount of time brings your credit score down. Having an account for a long time that you are unable to pay off appears to lenders as though you cannot be trusted to pay back your debts or that you choose not to fulfill your credit obligations. Some may also find that they can afford monthly payments for a credit card, but they need to take the time to pay off the card slowly. They may never let their accounts fall behind and still take a hit to their credit score for keeping the account open too long.
Another unknown risk factor for debt is to request to see your credit report too often. Every time you send off a credit inquiry your credit score takes another hit. Usually a credit inquiry will barely scratch the surface of your credit score. But if you apply for a lot of new credit in a short amount of time, or frequently apply for new credit it may send up a red flag to the credit reporting companies. Frequent requests for credit begins to look like acts of desperation to lenders and they become wary as to why you may be requesting so much credit. This system seems perfectly reasonable in theory, however it can start to be unfair to some consumers who are not taking advantage of the system. There are plenty of consumers who do not realize that the credit inquiries can affect their scores, and they sign up for several different credit accounts because their account limits are not high enough for the project they intend the credit account to pay for. Soon their credit starts to take a dive even though they can easily pay off their credit lines and never let their accounts fall into delinquency. And these days our credit check is being run for everything, not just applications for new credit. If you get a new job or apply for an apartment they will often pull a credit check to scale your trustworthiness.
Total Debt and Student Loans
Total debt can also negatively impact our credit scores, and for students this can be especially damaging. When we have large sums of debt the lenders see this as irresponsible behavior. The thing to remember is that credit reporting agencies don’t consider our income or the terms of an account when they calculate our credit scores. If there is someone who has a large sum of debt it is automatically looked upon negatively, without considering that person’s ability to pay back the debt. This can impact students exponentially harder than others because of student loan debt. When students sign up for their student loans through the government it is advertised as a great way to build credit while in college, even though these loans can actually negatively impact credit. Student loans can definitely help students build their credit after college if they are able to pay off their student loans on a regular basis. But while the student is still attending school, the students are not required to make monthly payments and they are often incapable of doing so even if they want to. The student loan debt then sits on their record and adds to their total debt.
Maxed Out Cards and More Student Loans
The higher the percentage of used credit is on each line of credit you have, then the lower your credit score becomes. For example, if I have a credit card with a $1000 limit and I charge $200 to it and quickly pay that off, it will positively affect my credit because I will have shown that I do not run up huge debt that I am incapable of paying off. However if I have the same $1000 card and charge the full $1000 to it, making low monthly payments, it will negatively affect my credit. The lenders want to know that the borrowers are using their credit wisely, and not maxing out their credit. This becomes unfair to students affected by student loan debt and others who have similar types of loans. Not only do student loans contribute to a person’s total debt, they also appear as maxed out lines of credit on the person’s credit report. Many credit card companies end up denying people lines of credit that they can easily pay off, especially college students who intend to pay off new credit cards during school and pay off their student loan debt after they have graduated. The companies will often cite something along the lines of “number of accounts which are using their maximum credit limit” as reasons for denying students new credit, which can leave students who would be able to pay off a new credit card in a bind.
It is important to always make sure of the terms and conditions with any new line of credit that you sign up for. Being unaware of these terms is one of the top reasons that many people accidentally trap themselves into debt. If your credit is less than perfect there are things you can do to help build your credit back up. The first thing to do is to make sure you pay off any existing debt, or contact your lenders to work out a plan that you can afford. A good way to build your credit back up after you have paid your existing debt, is to apply for a line of credit that you know you can manage, where the lender is willing to work with you.
There are options for people who feel like they can’t get any help. Those people who have been affected by bad credit due to circumstances beyond their control need second chances. We hope you will think of CreditCapitol.com as your second chance. We want to help you get the car or truck that you need with the financial package that fits your lifestyle.