In a culture such as ours that is dominated by consumerism, the shopping temptation stares at us from every corner. Day in and day out, the average American is bombarded with advertisements and commercials luring him or her to spend now and pay later. With the use of plastic money and consumer credit catapulting to unprecedented levels in the past decade, it comes as no surprise that foreclosures, delinquent payments, late payments, and bankruptcies have reached an all-time high. Complicating the financial equation is the general stagnation of household incomes which have struggled to accommodate the increase in consumer debt. Collectively, these factors have converged to produce bad credit, a financial termite jeopardizing the entire foundation of an individual’s life. The ramifications of bad credit are significant and widespread, impacting everything from housing and employment opportunities to mortgages and insurance rates. Borrowers who are delinquent, default on their payments, or suffer from bad credit expose themselves to the following consequences:

1. Higher fees and charges

Bad credit borrowers face increased fees and charges, such as late fees.

2. Higher interest rates

Credit is more costly when a consumer’s credit score is low. Delinquent credit card borrowers are often subject to a penalty interest rate ranging from 25 to 30%. Because credit card or loan applicants with tarnished credit pose a higher risk to lenders, the latter generally impose a higher rate of interest on them. For bad credit borrowers, this means hundreds if not thousands of dollars more in charges resulting from high loan or credit card rates. Furthermore, borrowers who are delinquent on one credit card are often hit with a higher interest rate on all their other cards pursuant to a policy known as ‘universal default’.

3. Housing complications

Credit-impaired debtors face an uphill battle when attempting to rent an apartment, house, or condo. Their choices are limited, as landlords typically perform a credit check prior to renting. Bad credit often results in the denial of a rental application. Landlords may request applicants with bad credit to make a deposit (a requirement that is usually waived for those with a good credit rating), obtain a co-signer, and/or pay a higher rent.

4. Loan or credit denial

Borrowers with a poor credit rating are less likely to be approved for loans or credit cards. Creditors place a premium on an applicant’s ability to repay a loan and his or her payment history. Too many student loans, unpaid taxes, repossession, foreclosure, or bankruptcy can keep consumers from qualifying for a line of credit, personal loan, car loan, or mortgage. Bad credit prevents debtors from purchasing electronic equipment, furniture, or anything on credit.

5. Denial of services

Borrowers who are delinquent on their rent payments or utility bills risk eviction or discontinuation of their service, respectively. To have their services reconnected, they will be required to pay expensive charges and deposits as well as any outstanding balances.

6. Obstacle to car loan eligibility

Bad credit makes it harder to qualify for an auto loan. Borrowers with a negative credit rating who do get approved for a car loan are slapped with costly dealer fees and charged double the interest rate, thus making vehicles unaffordable. The rate of interest may be as high as 20-25%.

7. Calls from collectors

Accounts of debtors with high unpaid balances are usually sold to professional debt purchasers or transferred to attorneys or collectors. Individuals with bad credit are also the subject of incessant calls from debt collection agencies. Consumers with bad credit are charged fees and accruing interest.

8. Inability to open a checking account

9. Disadvantage in relation to mortgages and other loans

As a general rule, mortgage lenders require applicants to have a good credit score. Since a bad credit rating indicates to creditors that an applicant is more likely not to make payments in a timely manner, it can shut the door to financing and result in the denial of a mortgage. Consumers with credit problems, such as FICO scores in the 600 range or below, bankruptcy filings, foreclosures, charge-offs, or recent unpaid balances pay higher down payments, interest rates, and origination fees. Individuals who have defaulted on their house payments for several months may be required to pay substantial fees in full to stop or avoid foreclosure.

10. Adverse impact on eligibility for car rental

Consumers with bad credit may experience difficulty in renting a car.

11. Insurance denial or hike in insurance rates

Many insurance providers – usually home and auto – take credit history into consideration when evaluating whether to renew or issue an insurance policy and how much coverage they will offer. Insurers rely on the data in prospective clients’ credit reports to create an insurance score, which forecasts the frequency of claim filing by the applicant and the expense associated with it. Insurance scores are based on the length of credit history, unpaid debts, collections, bankruptcies, and payment history. Applicants with bad credit pay more for insurance because insurance companies consider that a client’s credit history determines the odds that he or she will file a claim. Individuals with a poor credit rating may not be covered by an insured’s underwriting guidelines and may be denied a renewal.

12. Legal action

To recover funds owed, lenders have numerous remedies: (1) filing of a lawsuit, (2) foreclosure or lien on the borrower’s property, (3) repossession or seizure of the debtor’s assets (i.e. home, car), and 4) garnishment of the borrower’s wages.

13. Employment difficulties

Bad credit risks are viewed by prospective employers as irresponsible and therefore have a diminished chance of being hired. An increasing number of employers are utilizing credit reports for purposes of screening and hiring job applicants and evaluating employees for retention or promotion.

While wiping out a bad credit history is not a simple and rapid task, a good dose of discipline and patience produces positive results. What follows are some credit-building strategies for consumers with a blemished credit score:

Consulting a credit counseling agency which assists consumers with debt reduction and repayment; Obtaining a free copy of one’s credit report from each of the three leading consumer reporting agencies (Experian, TransUnion, and Equifax) and reviewing it for errors, inaccuracies, and incompleteness; Paying balances in full and on time; Keeping balances low (preferably lower than 20% of one’s credit limit); Ensuring that the credit bureau removes information concerning debts discharged in bankruptcy; Opening a line of credit at a gas station or department store and paying balances on time; Applying for a secured credit card that reports to the three main credit reporting agencies and using it to purchase items that are paid in full each month; Taking out bad credit personal loans and paying them off in a diligent manner, which would lead to lower interest rates and an improved credit score; Refinancing one’s mortgage via bad credit home loans; Asking a friend or relative to co-sign on a credit card or loan; Paying more than the minimum balance on one’s credit cards; Not applying for new credit card accounts; Closing old credit accounts that are unused; Enrolling in debt consolidation programs, whereby the borrower’s account is re-aged and marked as current as long as he or she is making payments consistently; and Entering into debt negotiation or settlement, which effectuates a 40-60% debt reduction and involves a lump sum payment of outstanding balances.

Before settling on a residence and signing along the dotted line, prospective homeowners must ask themselves the critical question- how much home they can afford. This, of course, is a function of their financial stability and creditworthiness, two leading factors gauged by a widely-used formula known as the debt-to-income ratio (DTI). Lenders assess a consumer’s financial health by determining the amount of income available once all debts have been aggregated. The debt to income measure involves comparing a borrower’s income to the total amount of debt owed to creditors. By monitoring their debt-to-income ratio, individuals can 1)avoid escalating consumer debtand significant credit problems, 2) view the positive impact on their personal finances of paying more than the minimum on their credit card bills, and 3) make judicious decisions about taking out loans and purchasing on credit. The DTI concept is employed in the context of mortgage affordability, thus assuming added importance when consumers are trying to obtain home financing. Lending institutions evaluate a prospective borrower’s credit status by examining his or her debt to income ratio. Some of the consequences of a high DTI include: 1) inability to benefit from favorable credit terms and the lowest rates of interest due to the fact that such borrowers are at a higher risk of defaulting or being delinquent on their loans, 2) difficulty to acquire additional credit in the event of an emergency, and 3) threatened ability to purchase big-ticket items when desired. By maintaining a low DTI, consumers will increase their chance of eligibility for optimal loan terms and interest rates when applying for consumer credit.

The debt-to-income ratio may be calculated via one of two methods depending on which debts are included in the computation:

Front ratio

This represents the portion of gross income that is applied towards housing costs. The front ratio for renters is calculated by dividing the rent by the income. Homeowners obtain this figure by dividing PITI- the principal, interest, taxes, and insurance- by income. By figuring out the DTI, borrowers will know how much money is available to pay off the mortgage each month. Under this method, the debt-to-income ratio is calculated by dividing the total monthly debt payments by the borrower’s gross monthly income. The first step consists in adding up the income from all sources. For credit purposes, DTI is always calculated using gross income, which means income before deductions and taxes. Gross income includes the following:

regular salary government benefits income from child support and alimony Income from interest and dividends overtime and bonuses commissions tips, and other yearly income

After adding up the above-mentioned figures, consumers should divide the number by 12 in order to arrive at the monthly gross income. To determine the amount they can afford to pay monthly on their mortgage, borrowers should multiply their monthly gross income by 0.28.

Back ratio

This represents the portion of gross income that is allocated to payment of recurring debt each month. Rotating or revolving charges include the following:

Minimum monthly payment on all loans and credit purchases (This includes payments on credit cards, student loan payments, credit union/bank loans, installment payments on appliances and furniture, car payments, home equity line of credit, or other loans) Payments for medical care Child support payments Alimony payments Rent or monthly mortgage payment

Borrowers should add up all of these debt payments and exclude monthly expenses such as utilities, entertainment and groceries.

In general, a lower DTI translates into greater financial security, and the closer to 0% the borrower is, the more likely he or she will achieve a debt-free existence. Conventional lenders usually prefer that payments on mortgages not exceed 28% of borrowers’ monthly gross income and that the total debt expenses- including student loan payments, credit card bills, mortgage payment, and other debts- be equal or less than 36% of their income. This is referred to as the 28/36 eligibility ratio. Therefore, a debt-to-income ratio of 36% or less is deemed good and survives the eligibility test. While some creditors approve loans for individuals with a DTI in the range of 37-40% or higher, these borrowers may face difficulty in paying their bills. Consumers in the 40% or higher bracket should consider seeking out debt help since their credit situation is in the red. On the other hand, flexibility in relation to the debt-to-income ratio is prevalent among subprime lenders, who typically issue bad credit mortgage loans to applicants with a DTI in the 45-55% range. In exchange for liberal eligibility, bad credit borrowers generally pay a higher interest rate. While debt-to-income ratios are guidelines, they are not bright line rules. When it comes to loan approval, creditors have a lot of leeway and tend to conduct a global evaluation of their candidates by taking into account their personal situations and reviewing their entire application. After all, circumstances such as spending habits, emergency expenses, and number of dependents influence the amount of debt that borrowers can expect to handle.

Along with the Fair Credit Reporting Act, the Fair Debt Collection Practices Act (FDCPA) forms the cornerstone for consumer credit protection in the United States. Its objectives are as follows: 1) to prohibit collection agencies from utilizing abusive debt collection methods, 2) to provide debtors with remedies as well as a mechanism for disputing the alleged debt in order to ensure the accuracy of debt information, and 3) to guarantee fair debt collection. While the Fair Debt Collection Practices Act does not relieve consumers of their duty to repay debts, it grants them rights vis-a-vis creditors and bill collectors. The federal law applies to consumer debt, which encompasses debts incurred through loans, first and second mortgages, or credit cards as well as household, family, and personal debts. Individuals who have defaulted on their payments or have errors on their credit report that cast them as delinquent are potential targets of debt collectors. The Act governs the conduct of debt collectors, or individuals who regularly conduct debt collection activities.

Pursuant to the FDCPA, debt collectors must act fairly and ethically as well as refrain from undue harassment and illegal collection tactics. They must make their identity known to the debtor and state the lender’s name and the amount of the debt. Debt collectors may not engage in the following practices:

1. Abuse or harassment

The Fair Debt Collection Practices Act allows collectors to contact consumers via mail, fax, or telephone. However, debt collection must be free of oppression, abuse, and harassment. For instance, debt collectors may not:

contact debtors at unreasonable times, that is before 8:00 a.m. or after 9 p.m. unless consented to by the latter make repeated phone calls threaten harm or violence; or mail correspondence which appears to have been sent from a court of law

2. False or misleading representations

It is unlawful for debt collectors to employ false or misleading statements in the course of collecting a debt. Some of the prohibited conduct in this category includes the following:

False representations by debt collectors that they work for credit reporting agencies or operate one False information about the debtor to third parties Misrepresentation concerning the amount of the debt False implication by the debt collector that he or she works for the government or is an attorney Threat to arrest the debtor if he or she fails to repay the sum owed Statement that the debtor’s wages or property will be seized or garnished unless the lender or debt collection agency plans to take such action and it is legally-justified Statement that the debtor will be sued when such an action would be illegal or when there is no intention to do so on the part of the collector; or Threat to bring criminal charges against the debtor

If a debt collection agency does in fact intend to report the consumer’s debt to a credit reporting agency or his or her case to a lawyer, a debt collector can make such a statement. What the law prohibits is a fabricated threat aimed at intimidating a debtor into making payments.

3. Unfair practices

The Fair Debt Collection Practices Act requires debt collectors to steer clear of unfair practices. Examples include:

Seizing or threatening to repossess debtor’s property unless the law permits it Collecting an amount exceeding the consumer’s debt, unless permitted under state law Menacing to publish or publishing debtor’s name in reference to non-payment of debt (except to a credit bureau); or Threatening to seize debtor’s property, unless the collection agency or lender can do so by legal means

If the debtor has legal counsel and asks the debt collector to address all inquiries to his or her attorney, the debt collector must cease all contact with the debtor. If the debtor is not represented by an attorney, thus barring an opportunity for the debt collector to enter into debt negotiation with the latter, the debt collector is allowed to contact third parties. However, he or she may only inquire about the debtor’s phone number, place of employment, or domicile. Under the Act, debt collectors may only communicate once with third parties (i.e. employers, relatives, neighbors). Within five days of their initial communication with the consumer, debt collectors must provide written notification of 1) the amount owed, 2) the creditor’s name, and 3) the debtor’s right to dispute the amount due partially or in its entirety if he or she claims the debt to be lacking in legitimacy. If within 30 days after being notified of the debt in writing, the debtor informs the collector in writing that he or she does not owe money; the latter must cease all contact with the debtor, except to inform him or her that it intends to take action. The debt collector may proceed with the collection if the consumer is furnished written evidence of the debt such as copies of bills for the sum owed.

Finally, the Fair Debt Collection Practices Act provides a legal remedy to wronged debtors, who can sue the collection agency in federal or state court within one year from the violation’s inception. Debt help is also available through the Federal Trade Commission and the state Attorney General’s Office, which may assist consumers with any issues involving debt collectors.

A credit score is a numerical representation of a consumer’s credit rating and a summary of the information on his or her credit report. Lending institutions, landlords, mortgage brokers, and employers utilize this pivotal number to gauge a prospective applicant or borrower’s creditworthiness and financial reliability, determine his or her eligibility for credit, and set the applicable interest rates and terms. Credit scores provide an indication of how much debt a particular applicant can comfortably assume. Lenders and banks rely on the credit score furnished by credit bureaus for deciding how much interest to charge to outweigh the risk of credit extensions and for making decisions regarding mortgages, loans, lines of credit, and credit card rates. Free credit scores are extremely useful for individuals seeking approval for credit cards or home mortgage loans or shopping for the optimal insurance rates. Bad credit places an obstacle in prospective borrowers’ path by preventing them from capitalizing on the lowest insurance rates or attractive rates on other categories of loans. Individuals with poor credit must fork out hundreds, if not thousands of dollars more than those with healthy credit. Good credit scores offer borrowers leverage to negotiate for the most favorable loan terms and obtain lower rates of interest. By maintaining a high credit score (i.e. 700+), consumers maximize their chances of getting approved for special credit card benefits and rates.

Typically, the range of credit scores runs from 300 to 850, with 350-640 constituting bad credit and 720-850 indicating excellent credit. The lower the number, the greater the risk a prospective borrower poses to a lender. Consequently, consumers with low credit scores are slapped with higher interest rates as a buffer against the elevated risk of default. Credit reports play a significant role in credit scoring systems. It is therefore imperative that consumers ensure the accuracy of their credit reports prior to submitting a loan or credit application. Free credit scores allow consumers to obtain direct feedback on lenders’ evaluations of their credit history and provide immediate insight on whether they need to exercise better credit management. To control their credit, consumers should first request a free credit score and report. Generally, credit reporting agencies are not required to furnish those free of charge. While the Fair Credit Reporting Act (FCRA) grants consumers the right to obtain annually a copy of their credit report from each of the three credit bureaus- Experian, Equifax, and TransUnion- it does not guarantee the same with respect to their credit score.

Identity theft protection and credit management services are the ones that typically provide the assessment of borrowers’ creditworthiness, also referred to as the credit score, at no cost. Numerous offers of free credit scores abound on the internet; usually, these are offered as part of a package. It is both safe and simple for consumers to obtain a free credit score and report online. Both independent websites and the three major credit reporting agencies extend offers of 3-in1 credit reports with three free credit scores (one per credit bureau), often with unrestricted online access to credit ratings. Consumers are simply required to validate their identity, usually by entering their account number. Upon confirmation, borrowers’ free credit scores and reports are instantly and securely transmitted to them through online channels. The credit bureaus often offer a trial membership that includes a 3-in-1 report from TransUnion, Experian, and Equifax, along with a free FICO score and helpful tips on how to boost one’s credit rating. Credit reporting agencies provide easy and fast online access to the free credit score.

Another way to obtain a free credit score is by applying for a credit card offer or signing up for a credit service such as a credit monitoring program which alerts consumers about changes in their credit profile or fraudulent activity. Credit card applicants might be offered a trial period- typically 30 days-to make use of free services such as access to their credit rating. To view their FICO score, they are usually required by the credit card company to submit their account number. Consumers may avail themselves of bank credit cards that provide gratuitous, unlimited online access to their credit score. Credit monitoring applicants who take advantage of a free trial membership receive a free credit score and report. Usually, credit monitoring services offer their customers continual access to their FICO score and credit report.