5 Bad Habits That Can Lead to Bad Credit or Even Bankruptcy

There’s lots of good ideas out there on what you can do to correct a bad credit or a bad debt situation. But have you ever taken a few minutes to think, “How in the heck did my credit get so bad?”.

Bad credit does not come about because it’s something that you thought about and planned for. It’s more like the opposite. It comes about because you’re enjoying your life, spending on what you want, not always just what you need.

Let’s face it. Credit is a great thing to have. Credit takes your life to a whole new level. Just try to book that hotel room in Las Vegas without a credit card! Most hotels wont even take cash because they want to bill you for that last meal or whatever after you’ve checked out.

But here are some ways to that you can ruin a good thing:

1. Never pay your bills on time.

2. Use credit cards for all purchases, large and small.

3. Borrow against the equity in your home.

4. Buy the most expensive car or home that you can afford.

5. Amass substantial student loan debts.

Now lets talk about this list for a minute. Are you always waiting until the last minute to pay your bills? If so, you’re cruising for a bruising. You should wait no more than a few days after you receive your bills to pay them.

Next, do you use credit cards for both large and small purchases? Everytime you pull up to the drive-thru at Wendy’s and McDonalds do you whip out that credit card? If so, you may be paying less and less attention to your credit card statement. Maybe you don’t notice the $5 charges. If you eat 3 meals a day that’s $450 per month or $5,400 per year that you didn’t even notice.

Do you want to upgrade that kitchen. Even if you decided not to upgrade the countertops, the cabinets or the floor, you would be looking at about 5 large for just appliances. Why not borrow against the equity in your home? Here’s the problem. The real estate market is always in flux. There is absolutely no way to tell what your house will sell for, until it’s already sold. Brokers require thousands in commission fees to sell your home. You could very easily end up taking a loss. Take too many losses and you’re in serious debt.

Buying cars, and homes are really about status. We want to feel good about ourselves and so we dress nice, buy expensive cars and homes. It’s much better to live below your means than above it. There are a lot of people abandoning nice homes because they finally figured out that they can’t afford it. People who drive luxury cars declare bankruptcy every day of the week.

As far as student loans go, I must add myself to the list of blind borrowers. When in college you think it’s going to be easy to pay those loans off. Well its not. Thank goodness the federal government now allows borrowers to use a "graduated payment plan." Also, if you are still taking classes or can prove that you are unemployed, you can file for a "forbearance" and skip a few payments. Instead of borrowing, should try to apply for scholarships at the school you want to attend. There are also local civics clubs who provide scholarships. You can also try at the state level. Apply first, borrow if you must.

The first step to maintaining good credit is knowing and understanding your credit report. Each year, you are entitled to a free credit report. The Federal Trade Commission provides free information regarding your rights here: http://www.ftc.gov/bcp/menus/consumer/credit/rights.shtm

If things get really bad, here are some of the things that you can do:

Debt Consolidation: If you are in a position to pay back the debt, you can opt for debt consolidation. You can consolidate all your debts into a single low interest credit card or take out an unsecured loan and clear off the single debt in installments every month.

Debt Negotiation: If your credit standing is not good and you are not in a financial position to pay off the single large monthly debt, then debt consolidation will not work. Debt negotiation may be an option. You can hire someone for a fee, or you can do it yourself. Using debt settlement companies generally are not a good idea because many tend to work for the credit card companies under the guise of “credit counselors”. They can negotiate about down to about 50% of what you owe, but the process can completely ruin your credit for seven years or longer. The best thing would be negotiate yourself, or with an attorney-based firm and try to keep the negotiations off your credit report.

Bankruptcy: This you be absolutely, positively your last resort. Bankruptcies stay on your credit report for at least 10 years and maybe longer. At this point, if you declare bankruptcy you have entered shark-invested waters. Every credit card and every loan will be at the highest possible rates. Potential employers will see that bankruptcy when they perform a background check. Not a good prospect. Everytime you seek to rent or purchase anything that requires a credit check, you can expect to be denied. As I said before, don’t do it unless there is absolutely, positively no way out.

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