Q: Can bad credit be erased?
A: Bad credit can be erased one of two ways; the first of which is time. Negative credit data must be removed from your credit report after seven years, although oftentimes you have to ask the credit bureau to remove it. The one exception to this seven-year rule is Chapter-7 Bad Credit, which stays on your credit report for ten years.
The other way to erase bad credit is simply to ask. If the negative information is incorrect, then you can demand that it be removed from your credit report. The credit-reporting agency will then contact the supposed creditor, and if the information really is inaccurate, the creditor will either admit that it’s wrong or will be unable to provide.
documentation proving otherwise — either way, the blemish on your credit report must be removed. Of course, you can use this loophole to your advantage even if the information is accurate. If you have reason to believe that your creditor does not keep good records, simply tell the credit-reporting agency that you believe the negative information to be inaccurate, and then the onus will be on the creditor to prove that you ever owed the money. Some people find this practice to be unethical, but others just think of the unethical methods used by creditors and consider this to be fighting fire with fire.
A slight variation on this strategy is to approach the creditor directly. For example, if you have an unpaid debt of $1,000 on your credit report, you may be able to go to the creditor and say, “I’m sorry about letting this debt accumulate, but now it is really damaging my credit score. Let’s work this out between us. If I give you $1,000 right here and now, will you tell the credit-reporting agency that this was all a misunderstanding?” Your creditor may even be willing to settle for less than the total amount owed. However, be aware that credit card companies are much less likely to do this. It’s not because they’re hard to deal with, (they can actually be quite accommodating if you only ask), it’s that they sell their debts to debt-collection companies rather quickly, and once this happens, the credit-card no longer has a claim on the debt, and the debt collector cannot say, “It was all a misunderstanding” — your credit report already reflects that the debt was sold to a third party.
Q: Can I buy a car with bad credit?
A: You can always buy a car, no matter what your credit score is… The issue is whether or not you can get financing.
When you have bad credit, you (theoretically) pose a greater risk to lenders. They are worried you won’t pay back your loan, in which case, they will have to repossess your car. In this way, car loans are secured loans — they are secured by the underlying property (your car). This is why car loans have lower interest rates than unsecured loans — car loans are less risky because the lender can always repossess the underlying property to recover his money. However, to do this is not free: It is a big and costly legal hassle, and since there is a limited amount of money that each bank can loan, they would prefer to lend it to safer borrowers with higher credit scores.
It’s not as easy to get a bad-credit (subprime) car loan today as it was even a year or eighteen months ago, but it’s not impossible. AutoLoans-NOW has a national network of lenders and dealers that will help you get financing for a car. One thing you can do to make yourself more credit-worthy is to have a substantial down payment for your car. This lessens the bank’s risk.
Q: How can I improve my bad credit score?
A: Improving your bad credit score consists of two main ideas: (1) Removing negative information already on your credit report, and (2) Having a positive credit profile as you move forward in your financial life.
You may challenge any information on your credit report that you think is inaccurate, or, if you have no ethical qualms about it, you can challenge information you only wish were inaccurate. Don’t go overboard with the latter, however. The credit-reporting agency is not going to believe that every single negative item on your credit report is false!
But the other half of improving your credit score, having a positive credit profile as you move forward, is even more important. That’s because negative information is erased from your credit report after seven years (ten in the case of Chapter-7 Bankruptcy Bad Credit), but positive information can stay indefinitely! Just what is positive information? Here is roughly how the major credit-reporting agencies determine your credit score:
-35% – punctuality of payment
-30% – the amount of debt, as the ratio of current balances to total available credit
-15% – length of credit history
-10% – types of credit used
-10% – recent inquiries
So first off, pay all of your bills on time. If you’re late with a single payment, it can really ding up your credit score.
Secondly, don’t be afraid of taking on new credit — just be wary of taking on new debt. The distinction can be thought of like this: Say yes to the credit card with a $1,000 limit, but never go over $200 on it. This will result in having 80% available credit, which is good for your credit score (#2).
Third, the older your longest-running current account, the better. So don’t rush to pay down your college loans or your mortgage or car loan — apply those payment to reducing your current credit-card balances instead. It will be much better for your credit report.
Fourth, the types of credit used are important. The three types are revolving (credit cards), installment (car loan, etc.), and “consumer finance” — which is typically bad news, (payday loans). Taking out consumer-finance debt can actually hurt your credit score, even if you pay your bills on time!
Finally, recent inquiries account for 10% of your credit score — so don’t apply for credit you don’t really want or need. Saving 10% at Toys ‘R Us could end up costing you thousands of dollars in extra interest!
Q: What is considered a bad credit score?
A: Typically, a credit score is a value expressed as a number between 300 and 850. This is the FICO score, developed by Fair Isaac & Company, but used by Equifax, Experian, and Transunion; the three largest credit-reporting agencies in the United States. There are other credit-scoring models, but most lenders rely on FICO, so we’ll deal with that one.
Although the worst possible credit score is theoretically 300, scores below 500 are pretty rare. Prosper.com, the popular person-to-person lending site that helps people with bad credit find loans, will not connect lenders with borrowers of scores below 520, and considers anything under 560 to be a “high risk” credit score.
People with credit scores below 620 typically do not qualify for the loans with the best terms. Instead, they get the infamous “subprime” loans. Therefore, 620 could be considered the cut-off point for “bad” vs. “good” credit — but of course it’s more complicated than that. Whether your credit is “bad” or “good” is really in the eye of the beholder — the potential lender. If you’re applying for financing on a Rolls Royce, then probably anything under 760 would be considered “bad,” but if you’re applying for a new cell phone, the creditor may think a score of 640 is great!
The median FICO score in the U.S. is 723; meaning that half of all people have a score higher than that, and half have scores that are lower. The mean-average score, however, is just 678, which tells us that there are a lot of people with bad scores “dragging down” the average from the median.
A decent way of seeing how your credit score ranks is to look at the Prosper grading system. As stated earlier, a score of 520-599 is “high risk” (scores below 520 are considered beyond high risk), but here are the other grades on the Prosper scale, along with corresponding credit scores:
- AA: 760+
- A: 720-759
- B: 680-719
- C: 640-679
- D: 600-639
- E: 560-599