- Personal Finance
Understanding and Dealing with the Draconian Consequences of a Low Credit Score
Low Credit Score
A low Credit Score will Hamper you Professionally and Financially.
A Low Credit Score can Hamper you Professionally and Financially.
If you become straddled with a low credit score, you may be labeled as being irresponsible. Worse, you may become a victim of discrimination and deemed more likely to commit theft. This misperception is more readily applied to minorities who are among groups that have suffered the greatest impact from our country’s recent economic crisis.
A large percentage of employers unfairly use credit reports to screen employees who are seeking employment. Studies show that one in ten individuals are denied employment based on findings in their credit reports; especially students, women, minorities, and seniors.
Fifty four percent of employers when interviewed stated that they ran credit reports on prospective employee to prevent theft and fraud, to prevent claims against themselves for negligent hiring; and to determine whether applicants are trustworthy .
As you can appreciate, the adverse consequence of bad credit score can easily affect you, as it affects job seekers at all levels.
Overspending is Not the Cause of Bad Credit
Typical Causes of Low Credit Scores
Contrary to misperceptions that financial irresponsibility is the cause for credit problems, studies have shown that over 50% of people who have filed bankruptcies were forced to do so because of health problems .
Other causes are:
Decreased work hours
These problems usually result in poor credit scores. Each person may be able to list many other reasons led to his or her financial difficulty.
Mismanagement of finances is rarely the cause.
Credit Checks by Employers Create Obstacles for People Seeking Employment
Are you Satisfied with your Credit Score?
Don’t be disheartened. A poor credit score does not mean that you are financially irresponsible. With the high unemployment levels, many people have become unable to pay bills or repay loans. Unfortunately, inability to pay bills or to repay loans will affect your credit scores.
Excessive use of credit card may also be seen as financial irresponsibility. This is hardly so in many cases. There are many unemployed individuals who have been forced to use their credit cards after becoming strapped for cash and unable to purchase necessities such as groceries and medications.
Using poor credit scores to create obstacles for people and forcing them into poverty while they are down is unfair.
Decrease in Credit Score
Bad Credit Scores do not Create a Greater Likelihood of Theft of Fraud
A person with bad credit is no more likely to steal than an individual with an excellent credit score. According to TransUnion, there is no statistical correlation between a poor credit report and likelihood to commit fraud.
People with strong ethical values do not lose those values simply because they are faced with hard times.
Many people lost jobs during the recession of December 2007 through June 2009. During those years, 8.4 million jobs were lost, causing drastic changes in family wealth. 
Should it be assumed that the American recession created many criminals?
Contrary to the unfair treatment imposed upon people with poor credit scores, people facing hard economic times have the greatest need for employment.
To deny them employment and to stigmatize them as being more likely to commit theft based on their low credit scores is discriminatory.
The Unemployment Rate of People subject to Credit Report Screening May Increase
In February 2014, Representative Elizabeth Warren proposed the Equal Employment for All to prevent employers from using an employee’s credit score as part of the screening process to determine eligibility for employment.
The act reads in relevant part:
(1) GENERAL PROHIBITION.—Except as provided in paragraph (3), a person, including a prospective employer or current employer, may not use a consumer report or investigative consumer report, or cause a consumer report or investigative consumer report to be procured, with respect to any consumer where any information contained in the report bears on the consumer’s creditworthiness, credit standing, or credit capacity-
(A) for employment purposes; or
(B) For making an adverse action
S.1837.The Equal Employment Act for All 2013
This proposed legislation overshadows the misconception that poor credit scores were somehow reflective of an employee’s character.
Enactment of this legislation will tremendously improve the lives of many Americans.
Myths related to Increases in Credit Scores
Many Prospective Employers and Lenders see your debt Summary, Credit Profile and FICO Scores
A prospective employer with access to your credit report will get to see your:
Your credit summary is a summary of information related to your financial accounts.
Percentage of credit currently available: If the percentage of credit available to you is low, a red flag is raised.
Number of satisfactory accounts: Too many unsatisfactory accounts will cause your prospective employer or lender to judge you.
Now delinquent Derogatory Accounts: Present delinquency will be used adversely against you.
Was delinquent derogatory accounts: Prospective employers or lenders will use your past occurrences of delinquencies to judge you.
Public Records: Bankruptcy, foreclosures, wage garnishment, unpaid tax liens and past due child support are listed on your credit report and will adversely affect your credit score.
Number of inquiries: Several inquires by others into your credit will affect your credit score.
Delinquent Accounts on your Credit Summary will Adversely affect you
Your debt summary looks at the amount of money owed to different creditors as outlined below:
- Revolving Debt (Credit and Retail Card)
- Installment Debts (Fixed Payment Loans)
- Other Debts
- Collection Debts
Your Approximate Total Debt
FICO Score (Credit Score)
Your Credit Score (FICO Score) is used by creditors to determine your credit risk or credit worthiness. The FICO score ranges from 300-800.
According to credit.com:
Bad =below 599
Scores below 599 may indicate that you are a credit risk.
Components of your Credit Score
Factors used to calculate the Credit Score
You credit score is made up of the five areas outlined below. The weight given to each area is indicated by the attached percentages:
Payment History 35%
Payment history is the most significant component of your credit score. This looks at your punctuality at making payments. Lack of punctuality will seriously impact your score.
Amount Owed 30%
The 'amount owed' component, analyzes the ratio of what you owe to your available credit. A red flag is raised if the ratio of debt owed seriously exceeds the amount of available credit.
Length of Credit History 15%
The FICO score considers the age of each account and the balances on these accounts over time. New accounts with sudden increases in balances will affect your scores. Carrying large unpaid balance for many months will lower your credit score. Older accounts with low balances are in your favor.
Types of Credit Used 10%
'Types of credit' looks at whether there are too many of any types of retail, installment, credit, finance company accounts that may decrease your credit score.
Past Credit Applications 10%
The 'past credit applications' component looks at number of applications for credit cards. Too many applications may reduce your credit score.
As you can imagine, if you have a low percentage of available credit, few or no satisfactory accounts, significant amount of delinquent accounts, large numbers of inquiries about you credit and a high total debt and a low FICO score then it may automatically be assumed that you are financially irresponsible or more likely to commit theft.
Significance of the Credit Score
Credit Score Components
Factors Used to Calculate your Credit Score
Items that impact the Credit Score
Lateness, delinquency, no payment, bankruptcies, liens.
Large number of loans with high balances and balances too close to maximum limits will affect your credit scores. Ability to make large payment on installment accounts will improve your score. Small balances and no missed payments increases score. High limits with small balances will help the debt to credit ratio.
Length of Credit History
Long history with creditors is good. How long have you had the oldest or newest accounts will impact your scores? Short history with high balances is considered poor management
Type of Credit Used
Finance loans, mortgage loans, retail loans, installment loans or credit cards loans are evaluated. Is this a good mix, or are there are too many credit cards?
New Credit and Inquiries
Your credit score will decrease if you open multiple credit cards in a short period of time with no record of longevity with other creditors. Many inquires by others will also decrease your score. Your own inquires do not impact your credit score.
A Credit Report Inquiry may Reveal Secrets that may Create Obstacles for you
How Prospective Lenders Use Low Credit Scores
If your credit score is below 680, you may be denied a loan or required to pay a higher interest rate. This hardly seems fair. The Lender will use a low credit score to determine your probability of defaulting on a loan within a specific time frame. 
Lenders will use the score to determine whether you are entitled to a line of credit and at what rate. Lenders use the credit score to determine whether they should deny or approve your loan application. A credit score of 599 may mean an immediate denial. A score of 700-749 mean mean a higher interest rate than a score of 750 and above.
A landlord will also use your credit report to determine whether you will default on your rent.
Managing Bad Credit may be Easier Said than Done
How to Repair and Minimize the effects of a Poor Credit Score
Repairing a bad credit rating is not always easy. However, consumers who have defaulted on loans or have delinquent accounts may avoid the draconian effect of a perpetual poor credit rating by reducing the amount of debt owed, make payments on time, dispute debts, refinance; document recent approval for loan or credit; and explain the reason for bad credit to your prospective employer.
Reduce the Amount of Debt Owed
Reducing the amount of debt that you owe may be difficult for you. However, reduction of debt is the surest way of improving your credit score.
- Pay to delete. If you have accounts that are in collection, simply making payments to collection will not improve your credit score. You must negotiate a pay to delete payment option for bills that are in collection. A pay to delete option allows you to negotiable removal of the negative information from your credit report in exchange for making a negotiated payment.
Follow these suggestions for crafting your pay to delete letter to the collection agency:
- Agree to pay a sum certain to satisfy the entire debt in exchange for their agreement to remove the information from credit reporting agencies and your credit files within 1 week of payment.
- Agree to pay approximately 25% of the amount owed to fully satisfy the entire debt. Remember that collection agencies purchase these bad debts for small amounts. As such, a 25% offer allows them to make a large profit. 
- Get the agency's signed agreement that the negotiated settlement will remain confidential.
- Be prepared to make the payment amount agreed upon and send your letter by certified mail with return receipt.
- Do not succumb to their first rejection. Keep insisting and negotiating for a pay to delete option.
- If the collection agency refuses to agree to a pay to delete settlement, then negotiate for a reduction in your balance and request a payment plan that you can afford.
- Properly Manage Credit Cards: Limiting use of credit cards is usually a good idea. However do not close them. Closing your credit cards will actually cause your credit scores to decrease. Lenders will automatically close credit cards that are not in use. As such,you should try to buy something inexpensive once per month with credit cards that are rarely used.
However, if you cannot afford to make any type of payment on a credit card, then it makes sense to stop using them.
- Try to make more than the minimum payment if possible
- Make payments on debts with high interest rates first
- Negotiate decreases in your interest rates
- Set up payment plans with creditors
Unemployment Caused by Poor Credit Score may cause Hopelessness
Make Payments on Time
Late payments are reported to all credit bureaus. Late payments will cause your creditors to increase your interest rate.
Making payments after their due date is instrumental in the reduction of your credit score. For example, if your credit score is 680, a payment that is 30 days late will reduce your credit score by 80 points; if your credit score is 780, late payment may reduce you credit score by 110 point s.  The more frequently that you are late, the further your credit score will plunge. Late payments are also costly as creditors may assess a $15-$35 late fee.
Try to make payments by their due date. A good idea is to mark due dates on your calendar or to set up cell phone alerts for all due dates.
If you must be late then try not to go above 30 days. Creditors will report payments that are greater than 30 days late to credit bureaus.
There are often errors in reports made by Credit Card Companies
Dispute Credit Card Debts
Creditors will not hesitate to report disputed debts to credit bureaus. However, be aware that creditors make errors in many cases. The Federal Trade Commission (FTC) has reported that one in five Americans have mistakes in their credit scores. Mistakes on credit scores usual remain in place unless challenged aggressively by consumers as creditors are usually resistive to making corrections.
Get into the habit of checking your credit score. Checking your credit score will not cause your score to decrease. You should obtain your credit score from all three reporting bureaus. The credit scores from these three bureaus are usually close. However, there are times when negative information shows up in one agency report that is not reported on another. When this occurs, you should immediately begin you investigation by contacting your creditors and the credit bureaus and challenge the report that you believe is inaccurate.
Log into Equifax.com, transunion.com or Experian.com and enter the word ‘dispute’ in the search box to get directions on the online dispute process. These companies will reach out to the various creditors who reported the negative information.
The information will be removed if it was not verified. It will remain in place if verified. The credit bureau may modify the information based on new findings. 
Equifax, Experian and Trans Union are required to provide each consumer with one free credit report annually. Your free credit report can be obtained from www.annualcreditreport.com.
If you need information more frequently, companies such as Kreditcarma.com offers free credit score checks. Don’t hesitate to contact the credit bureaus to challenge information that is incorrect
Three Credit Bureaus
If you are lucky enough to have equity in your home, you may refinance your mortgage and include your credit card debt in the package. Refinancing your credit card debt with your home mortgage will help to improve your credit rating.
After a refinance, you will be making one monthly payment to the refinance company at a much lower interest rate.
You will not be barred from using your credit cards after refinance. However, you should carefully evaluate the reasons why you had high credit card balances in the first place to prevent a repeat occurrence.
Refinancing offers you a clean slate with the credit card companies. Upon refinance of all your credit cards you may see your credit score suddenly change from 500 to 800.
Loans that are well Managed will Improve your Credit Score
Despite your low credit score and feelings of hopelessness, there are companies that will extend loans to you. Be prepared to pay a punitive interest rates. Some companies will match you to a lender sometimes within 1-2 days.
Please be sure to read all information related to their rates and terms before applying to these companies:
Some of these companies are:
- United lending services.com
- United States credit.com
Remember that borrowing from Peter to pay Paul is not a good idea. Getting a personal loan after having bad credit issues is an option to be exercised only if you are desperately in need monies and need to reestablish your credit.
Credit Cards for People with Low Credit Scores May actually Improve Your Credit Score
Credit Cards for People with Low Credit Scores
Despite the publicized disadvantages of credit card use, responsible use of credit card may actually help to improve your credit rating. Credit card companies report to the three credit card reporting agencies which will allow you to start rebuilding your credit.
You should not be surprised that there are special credit cards available to people with low credit scores. Companies like Creditkarma.com will match you with credit card companies that will extend credit cards to you.
Many of the cards are offered with limitations. Some of the limitations are:
- A low credit limit between $250-$500
- Opportunity to increase your credit limit after proving yourself
- Some may require a bank deposit that will be used to fund the card.
- You must agree to the high APR. A few may offer lower APR.
This is a short list of credit card companies that will offer you credit cards despite your bad credit:
First Premier Bank
Digital Federal Credit Union
First National Bank
Explain the Reason for your Decreased Credit Score to Prospective Employers
Closing all credit card accounts will not increase your credit
Checking your own credit scores will not decrease your credit score
Many Consumers have errors on their credit reports. As such, do not hesitate to dispute suspected errors.
Explain the Reason for Bad Credit to Your Prospective Employer
Most employers are aware of problems encountered by many Americans during the December 2007 through June 2009 recession. Many employers have also been personally impacted by the depressed economy.
Peoples' credit scores have changed over the past few years. According to MYFICO.com, the average credit score in United States is below 736 as of December 2013. 
If your credit report was impacted by a prior job loss, then you should explain the circumstances that led to the loss. Explain how a medical condition affected your credit without going into details. An employer should understand how decreased work hours and insufficient business would ability to manage expenses.
Credit Counseling May Help People with Poor Credit Scoes
People will chronically low credit scores and financial problems may benefit from credit counseling. Credit counseling agencies will help you establish a budget and help you to negotiate lower payments with your creditors. There are many local agencies available to you that are accredited by the Council on Accreditation and the International Organization of Standardization.
The organizations and government bodies listed below will direct you to local offices where you can get help:
- National Foundation for Credit Counseling: http://www.nfcc.org/
- List of Credit Agencies Approved pursuant to 11 U.S.C. § 111 http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm
- U.S. Department of Housing and Urban Development. http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm
- Approved credit Counseling Agencies and Debtor Education Providers. http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyResources/ApprovedCreditAndDebtCounselors.aspx
Prior to accepting counseling you must ask whether the counselor is certified by the National Foundation for credit Counseling (NFCC).
Myths Related to Credit Score Increases
Having a low credit score can severely hamper your chances of succeeding in our present economy. Do all that is necessary to improve your credit, or you will continue to be misjudged by employers and denied credit by lenders.
Credit Scores Before and After
 Bill aims to Stop Employers from conducting credit Checks. CNN Money. Retrieved from: http://money.cnn.com/2013/12/17/pf/employer-credit-checks/
 Johne, Marjo. Do Credit Checks really prove your job worthiness? The Globe and Mail. Retrieved from: [http://www.theglobeandmail.com/report-on-business/small-business/sb-managing/do-credit-checks-really-prove-your-job-worthiness/article567813/
 The Great Recession. The State of Working America. Retrieved from: http://stateofworkingamerica.org/great-recession/
 Senator Warren Introduces Legislation to Prohibit Employers From Requiring Credit Report Disclosure. Retrieved from: http://www.warren.senate.gov/?p=press_release&id=305
 Dranove, D and Milleson, Michael. Medical Bankruptcy : Myth Vs. Fact. Retrieved from: http://content.healthaffairs.org/content/25/2/w74.full.
 Settling the Credit Score: How Lenders Judge Consumers. Retrieved from: http://www.marketplace.org/topics/your-money/settling-credit-score-how-lenders-judge-consumers]
 Remove Collections From Your Credit Files by Using the Pay for Delete Technique. Retrieved from: [http://www.creditinfocenter.com/debt/pay-for-delete.shtml]
 How late Payments affect your credit scores. Retrieved from: https://www.creditkarma.com/article/late-payments-affect-credit-score
 Credit Report Disputes. Retrieved from: https://www.transunion.com/personal-credit/credit-disputes/credit-disputes.page]
 National Average Credit Score. Money-Zine. Retrieved from: http://www.money-zine.com/financial-planning/debt-consolidation/national-average-credit-score/
Sample Pay for Delete Letter. About.com: http://credit.about.com/od/debtcollection/a/payfordelete.htm
Credit Solution Program. http://www.thecreditsolutionprogram.com/about/
The Five Categories of Data in FICO Scores. http://www.myfico.com/crediteducation/whatsinyourscore.aspx
Remove Collections From Your Credit Files by Using the Pay for Delete Technique. http://www.creditinfocenter.com/debt/pay-for-delete.shtml
The Great Recession. The State of Working America. http://stateofworkingamerica.org/great-recession/
The Average Credit Score. Credit.Com. https://www.credit.com/credit-scores/what-is-the-average-credit-score/