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Three Reasons Why "Bad Credit" Ain't (Always) All It's Cracked Up to Be

[May 20, 2009.]


In the days before this Digital Age, the ability to borrow was based upon the lender's and, to some degree, the public's perception of the prospective borrower. Had this person repaid previous debts? How exactly were they planning to pay this loan back?

Those questions are still pertinent to today's lending reality, but another question seems to have taken precedence in the minds of many lenders and even many borrowers. The ever-present:

"What's your credit score?"

It's a fair question, no doubt, but doesn't always tell the whole story. Below are five situations when a "bad" credit score may not accurately reflect the creditworthiness of a borrower:

1. Bad Credit Created During Youth

The credit card legislation recently passed by the U.S. Senate includes new regulations on how credit card companies can and cannot sign up college kids for credit cards. These regulations, had they been in place over the past ten years, could have saved many a credit score.

2. Bad Credit Due to Death or Divorce

People who married the wrong person or who married the right person but then that person died often find themselves with below average credit scores. This is especially true in situations where one spouse signs up the other spouse for credit cards, charges them up, and then doesn't pay the bills.

Credit rating agencies know this happens, but the innocent spouse's credit score still suffers.

3. Bad Credit Because of the Housing Disaster

Although certainly borrowers must be held accountable to some degree for taking out mortgages they couldn't pay back, it's obvious that some borrowers were brutally tricked by unsavory loan officers and greedy banks in the first years of the 21st Century.

To push an "Option ARM" loan with a bogus "teaser rate" to a low-wage immigrant that doesn't speak English is a travesty, and yet it was happening every day in this nation from 2002-2007.

Borrowers who have undergone a foreclosure as a result of the housing disaster, and thus now have a ruined credit score, may not deserve a "pass," but they may not deserve to be unable to get any unsecured personal loan for the next seven years, either.

Explain But Never Excuse Reasons for Bad Credit Score

Lenders do not like excuses. They like being paid back plus interest.

Nevertheless, a borrower with a poor credit score who is applying for an unsecured personal may benefit from being prepared to explain what caused this poor credit score to arise. If the reasons why are related to any of the above, an honest, valid explanation may help a lender see a person, rather than just a number.

A number is, after all, just a number.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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