Cause and Effect of Bad Credit
People deal with various problems that can side track the person financially, even affect the person’s credit rating, and cause emotional hardship brought on by the stress of not being able to deal with the situation. Problems can be cause by Loss of work, a family emergency, personal injury, and being overwhelmed by medical costs. These things can result in a person not being able to pay existing obligations to creditors, utility companies, or even the landlord. I want to talk about the effects which can occurs resulting from defaulting on credit obligations.
1st. When a consumer falls behind, the creditor is going to give them a warning, if the payments are not caught up in time, the creditor can assess a late fee, the creditor can increase the interest rate, and the creditor can lower the credit limit. If the balance exceeds the credit limit, the creditor can also assess an over the limit fee. It is like a snow ball rolling down hill, just gaining momentum and increasing the problem in size the further it goes unchecked.
2nd. The creditor will report the defaulted account to the credit reporting agency, late listings, collections, and charge offs can stay on the credit report for 7 years. In some cases the reporting can be extended to 10 years if the consumer has to file for bankruptcy, if the consumer gets a lien or defaulted student loan, the reporting can be extended indefinitely until paid. Consumers can read up more on reporting periods by visiting the Federal Trade Commission web site at: www.ftc.gov
3rd. The defaulted accounts added to the consumer’s credit report will drastically affect the consumers credit score. This will prevent the consumer from being able to get the best possible rates when he or she has to apply for new credit, utilities, rent, employment, and insurance. The consumer may even have to pay a deposit, application fee, or maintenance fee. The additional cost over 7 years will cost the consumer thousands of dollars in lost revenue.
4th. Even after the information on the credit report has expired and went away, the consumer will be left with no credit. The consumer will have to start over building new credit. He or she might have to resort to using sub-prime lenders to rebuild. This will negatively affect approval when trying to upgrade to prime credit. So the damage to the financial improvement will last even longer than the 7 years of bad credit reporting.
5th. There is the emotional strain of dealing with bad credit, loss of sleep, inability to plan effectively a recovery, maybe even stress from having to borrow from loved ones, or worse having to resort to using pay-day loans, personal finance loans, or title loans. Some consumers unfortunately do take his or her life, and it is a great devastation to lose a life, because of something like debt. Consumers facing financial problems need support from family and friends to build confidence and be able to overcome and progress to better days.
In conclusion, I want to stress steps that each consumer should take before hand to try to stave off disaster, to better prepare to deal with set backs.
A. The consumer should get reference letters from employers and co-workers. This will go a long way in being able to get a new job quickly if laid off.
B. The consumer should supplement his or her medical insurance, there are such things as Medical Savings accounts, this way the consumer has something to fall back on if he or she looses their job and employers medical insurance.
C. If the consumer has credit cards, buy into the credit card protection plans, these are for such emergencies that a consumer loses work and is unable to pay for a period of time.
D. The consumer should save up 6 to 12 months of emergency funds. That is totaling all expenses each month and multiplying that by 6 or 12 months.
It is important that a consumer take a serious approach of handling emergencies, to set a plan of action to take should events take place out of his or her control. This will not always prevent the inevitable, if the circumstances are too sever, but it will go along way in helping the consumer feel better that they did his or her best to overcome.
