I call this the Bad Credit Trap. This is a trap most consumers will never get out of. The system won’t naturally allow them to recover.
In my career, I have heard thousands of clients tell me how good their credit was before it went bad. But I have never had even one client with good credit tell me their credit was bad and it magically got better.
Most with bad credit never recover. That is a fact. And the reason is that the system is against them from the start.
Consumers with credit issues are not in their situations because they are bad people. They are sucked into a trap that most simply don’t know how to recover from.
Credit problems usually stem from an uncontrollable event. Some have a car crash or medical issue that compiles medical bills. Many others go through divorce or have credit too young, leading to issues where a default or late payment occurs.
There are thousands of reasons things happen, but let’s just say life happens. And when life happens, and even one account gets paid late, a downward credit spiral then begins. Even if the late payment was for one credit card, most other card companies will claim their risk is higher.
Several things start to happen at this point.
First, many creditors will lower their limits. If a creditor lowers the high credit limit on an account, the credit score always goes down. This is due to 1/3 of your credit score being based on your Available Credit.
Now the consumer has less available credit, right when they obviously need it. Plus, with lower available credit, they will face more overdraft fees. And the credit scores drop and risk increases for all other accounts, due to the lower score.
Now creditors will start to increase interest rates due to the increased risk. All creditors can’t do this, but in the fine print, many reserve the right to do just this.
The higher rates mean the payments also increase. The consumer is now faced with higher payments on several of their accounts, not to mention having to pay their original late fees.
Eventually, this leads to many consumers going late on other payments. Then things start to get really bad, really fast. In a very short period of time, credit that once was good is now left destroyed.
This means all new credit the consumer applies for will only be approved at high risk rates. This costs hundreds more dollars every month and radically deteriorates the consumer’s quality of life, for many years to come.
Most consumers continue to then struggle all their life with this cycle. The high interest rates and payments leave them living paycheck-to-paycheck. And they commonly go late on their payments after that, as they struggle to pay outlandishly high interest rates and payments.
This is the Bad Credit Cycle. Many times, it starts with one unavoidable late payment. But in the end, it costs most any chance of having a healthy financial future.
Life with Good Credit
Life with good credit is an entirely different story. Many people believe they want to be rich, financially. But what many don’t realize is that their fantasy life has less to do with being rich and more to do with having good credit.
Mercedes Benz is a great symbol of car luxury. Many dream of having the opportunity to own one. In their dreams, they fantasize about being rich and driving a Mercedes.
With good credit, a brand new Mercedes Benz can cost $326 monthly. Even a luxury home can be financed for less than $1,000 monthly.
The secret to wealth, in many cases, has less to do with being rich and more to do with credit quality. Even a crazy dream like walking into a store and buying whatever you want or buying a car on your credit can be reached if you have good credit, and even if you are not wealthy.
Good credit won’t stand in the way of getting a good job or getting approved for new credit at 0% interest rates. Good credit makes living the American dream of home ownership a reality. It even makes driving a Corvette or a Harley Davidson practical.
Credit lines are issued to consumers based on their credit quality. With good credit, it is common for consumers to receive credit lines and credit cards for $10,000 or higher. In many cases the interest on those cards is also less than 3%, making them ideal for many situations, especially emergencies. Good credit creates peace of mind for this reason.
Let me tell you a little lender secret here. Good credit clients in most businesses are treated better than those with credit issues.
Auto dealers, banks, mortgage companies may try not to, but most do treat good credit customers superior.
I don’t agree with this at all, but I saw it every day of my financial career. Good credit customers are offered better deals than those with credit issues.
The main reason is that good credit buyers are stereotyped as smart, intellectual, educated, people who do their research and will leave in a minute if they think they are being taken advantage of. So this fear has most sales managers coddling good credit prospects.
In today’s society, good credit is like being rich. When you have it you are treated better, can spend more and pay less, and absolutely afford to have the life of your dreams.
