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What determines Good Credit vs. Bad Credit?

A FICO (Fair Isaac Company) score is the first decisive factor in how a lender will review your application for a loan. While every lender varies on what its minimum FICO score to extend a loan is, the minimum good credit rating scale fluctuates generally between a 650 to 720 FICO score.

There are three major reporting bureaus that creditors may rely on regarding your credit report:

  • Experian
  • Equifax
  • Transunion

Lenders may use one or a combination of all three bureaus to issue a decision on a loan. A decision may also be based on your employment record, your debt-to-income ratio and how much cash you have in the bank.

Contacting a licensed credit counselor for advice is always a good way to determine where you stand.

Why is having a good credit so important?

When you are looking to buy and get a loan on anything today &mdash a home, automobile, applying for a credit card, and in some cases even getting a job  — having a good credit rating is critical. A bad credit rating will make it difficult to qualify for any loan. And if you do qualify, you will pay a premium interest rate. The interest rate you pay &mdash and thus your monthly payments &mdash will depend on your credit rating. The better your credit rating, the lower the interest rate you will pay on a loan.

What is considered good credit?

Your credit rating is determined by a variety of factors, including your past credit history and current debt-to-income ratio, as well as unsecured debt like a credit card versus other good debt like a mortgage.

I found out I have bad credit. What now?

Knowledge is key in this case. Contact all creditors that reported negatively on your credit report to see if there is a way to work with them to arrange payments or even get the bad mark eliminated from your credit report. It is always wise to contact a credit counseling professional for advice on your particular circumstances.

How does a foreclosure affect my credit?

This is a critical question that you must ask yourself when facing foreclosure. A foreclosure affects your credit on a large scale. Your credit score can drop as much as 250 to 280 points for as long as seven years.

The silver lining to this cloud is that your credit score cannot drop below "0." It is said that "time heals all wounds" and this is especially true when it comes to your credit rating in a foreclosure. Your credit score is always changing and in time will rise back up.

To move forward, you can focus on making payments on time and educate yourself on how your buying behaviors will affect both your short- and long-term financial goals. Always consult with a professional about the best way going about repairing your credit.

How does a short sale affect my credit?

Facing a possible foreclosure is a daunting experience. A short sale will affect your credit; however, not on the same scale as a foreclosure. Typically, a short sale will lower your credit score 80 to 100 points. A deed-in-lieu of foreclosure normally drops your credit score 120 to 175 points. Clearly, it is in a homeowner's best interest to short sale or sell his or her home by other means before losing it to foreclosure.

How does a bankruptcy affect my credit?

Traditionally, bankruptcies have a damaging impact on your credit.

There are several different types of bankruptcy filings. They all affect your credit similarly. Individuals typically file either a Chapter 7 or Chapter 13.

A Chapter 13 bankruptcy is a reorganization and does not discharge you of your debts. It is designed to give you time to negotiate with your creditors a payoff or "work out" in a way that is easily manageable. A Chapter 13 bankruptcy will initially drop your credit score 100 to 250 points. With this reorganization your credit score bill bounce back more quickly than in the case of a Chapter 7 bankruptcy.

A Chapter 7 bankruptcy filing releases all your debts (exceptions are income taxes, back child support and alimony). The downside to this is your credit score can go down as much as 300 points and it could take seven to 10 years for a Chapter 7 bankruptcy to be removed from your credit report.

Always consult with an attorney who specializes in bankruptcy before deciding to file for any type of bankruptcy protection.

Can I fix my credit myself or do I need a professional?

Yes! In fact, you can save yourself a lot of money by taking a "do it yourself" approach to repairing your credit. All it takes is a little bit of time, patience and knowledge to get it done right.

The first step is to request a free credit score and examine it for negative items and potential errors. Make an itemized list of each error(s) and the reason(s) that they should be disputed.

Important: Be prepared to dispute every item in writing, as well as include supporting documents such as bank statements, canceled checks, receipts, etc. It is always wise to send your letter (or letters if multiple credit bureaus are reporting the same errors) via registered or certified mail. Each credit bureau will investigate your claims of inaccurate credit reporting and make corrections if necessary.

We suggest reviewing the credit section of the FTC Web site, which includes a helpful section on repairing your own credit. Detailed information includes sample letters, laws, procedures and who to contact for additional information on credit reports and repair.

What is a deficiency judgement and what part can it play in a foreclosure?

A deficiency judgment is when a lien is obtained against a debtor when the mortgage has not been paid in full after a foreclosure or a short sale.

In many cases, whether or not a lender will pursue a deficiency judgment depends on many factors, including the state in which the borrower lives, other liens and mortgages owed or even if he or she is paying his or her other bills on time.

More than 30 states have laws on the books that allow lenders to file for a deficiency judgment, including Texas, New York and Florida. California does not permit deficiency judgments liens, which makes it a "non-recourse" state. However, if you refinanced your home or took a second mortgage you may be subject to claims for part or the entire deficient amount.

A lender may or may not decide to move forward on a deficiency judgment after looking at your entire financial picture based on information submitted and checking your credit report. The lender may not pursue a deficiency judgment if you are paying all of your bills late or they may go after the deficiency judgment if all your other bills are being paid on time and only your mortgage is in default.

Anyone who is being pursued for a deficiency judgment or already has the lien against them should seek the advice of an attorney to determine possible solutions, including bankruptcy.

How will the new credit card laws affect my credit?

The Credit Card Act of 2009 is designed to assist consumers with spiraling credit card fees and interest rates by limiting what credit card issuers can charge.

The law includes limits on fees and interest rates that credit card issuers can charge and how they inform the consumer when fees will be raised. It also limits "universal default," which had previously allowed credit card companies to raise your interest based on your payment records with other credit card issuers. You now have the right to "opt out" if you do not agree to any new terms to your credit card agreement. You will be able to close your account without penalty and pay off the balance in five years at the current interest rate.

While the law is intended to protect consumers, you still need to keep a watchful eye on your credit. The law does not fully protect you from all aspects of credit. Being proactive can save you time and money. Read your statements thoroughly as soon as you get them, make your payments on time and contact your credit card issuer immediately if you find discrepancies on your bill.

10 Tips to Better Credit

  • 01) Check your credit report often
    You are entitled to annual credit reports. See your credit report now.
  • 02) Know your FICO score
    It is a major factor in how banks decide to extend loans and credit.
  • 03) Review your credit report often
    It is important to periodically review your credit report for discrepancies.
  • 04) Report discrepancies Make sure you report all discrepansies to the three major credit reporting agencies. They will investigate.
  • 05) Contact your creditors Don't be afraid to contact your creditors to negotiate a payment plan to reduce impact on your credit.
  • 06) Contact an approved consumer credit counselor
    A credit counselor is a great option for help. Check the U.S. Government Directory.
  • 07) Avoid bad credit debt
    Use credit cards sparingly and make payments on time.
  • 08) Missing mortgage payments?
    Try to avoid a foreclosure by working out a plan with your mortgage lender. Get help from HOPE NOW.
  • 09) Contact a bankruptcy attorney for advice
    Bankruptcy has a harmful effect on your credit. Try and avoid it.
  • 10) Protect yourself from identity theft
    Identity theft can wreak havoc on your credit. Protect yourself now!

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