Bad Credit - Understand the Consequences

You would have to live under a rock to not understand that millions of America’s are struggling due to the economy.

Whether due to a home you need to sell but can’t or job loss, you may find yourself with bad credit. If this is a new situation for you, you may be scared and wondering what the consequences are of falling behind on your bills.

First, breathe! Yes, there are consequences to face. The good news is that you can’t go to jail for not paying your bills in America. The single most important thing you can do is realize that this is a temporary situation and you will get through it!

Minor late payments on bills are really not that big of an issue. You will be charged some late fees and your credit score will suffer. If it is a credit card, your lender may even put a freeze on the account.

But overall, being less than 60 days late on a bill is not something you should lay up at night worrying about. The best thing you can do is communicate with your creditors and focus on doing what it takes to get out of the situation. Many creditors are happy to work out a payment plan with you and most will even report your payment as being made on time while you are under this plan.

Once accounts are seriously delinquent or charged off there are other consequences that you may face.

After a period of time, your debt will most likely be turned over to a collection agency. These agencies are paid only on commission and because of this, they can be quite aggressive. Though there are laws that prevent this, some collectors can become abusive. It is important that you understand your rights and not subject yourself to undue harassment.

The collection agency may offer you a settlement for less than the amount owed. It is important to understand the consequences of such a settlement before accepting it. Most will report the debt as being settled for less than the balance, which will obviously damage your credit for quite some time. Additionally, there may be tax consequences, so you will want to speak with your CPA before accepting such an offer.

If the collection agency fails to collect the debt, the creditor may decide to sue you. If the lender sues you and wins, they may garnish your wages. This is when your employer gives them a set amount of your income each month prior to you receiving a pay check.

Falling behind on secured loans, such as a vehicle or home can subject you to losing your property. Repossessions and foreclosures are the eventuality if you can’t make your payments on car or home loans.

Even after the creditor takes the property, they may sue you for anything still owed after the property is sold. If they are awarded a deficiency judgment, they can pursue you for the amount of that judgment. Lenders are most likely to do this if you have stable employment and they believe they can garnish your wages.

The future effects of bad credit largely depend on just how bad your credit is! Renting a house or apartment can become difficult and you may be turned down for new credit. Some people even have difficulty finding a job, because most employers pull credit.

Obviously having damaged credit has serious consequences on your ability to build wealth. You will spend thousands of dollars in increased interest due to not qualifying for the best rates.

Repairing your credit is critical to your long term financial well being, but something that anyone can accomplish with time.

Wendy Polisi is the founder of Credit Repair College and Finance the Dream. Their video training is designed to allow consumers to take control of their financial future by learning the insider secrets of credit repair. For more information on credit repair, please visit them on the web.