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The next step in your credit rebuilding process is to get a loan from a bank or credit union and then pay the money back on time. A good way to handle this is by setting up an appointment with a loan officer at your bank or credit union to discuss your needs. The best place to do this is at a bank where you have a savings and checking account. You will need to be upfront with the loan officer about your financial problems. She'll see this anyway when she looks at your credit reports. Explain what you're doing to improve your finances and let her know you have started the credit rebuilding process. And, as part of this process, you would like a small bank loan. If the bank or credit union turns you down be sure to find out why. You will then need to address the reasons why you got a thumbs down.
If you are able to get a loan, you will need to make all your payments on time and live up to whatever are the other terms of your agreement with the bank or credit union. Once you've repaid the loan, you need to get a copy of your credit history from whichever credit reporting bureau the lender reports to so that you can be sure that your loan-related information is accurate.
Apply for a second loan
A last step in your credit rebuilding process is to apply for another loan, hopefully with the lender that gave you the first one. If the first one was secured you may qualify this time for an unsecured loan. If not, get another secured loan. Eventually, over time, as the information in your credit reports improves, you'll be able to get an unsecured loan.
Your credit going forward after bad credit
As your credit rebuilding process goes forward, assuming that you make all of your payments and on time, your credit history will gradually become more positive, your FICO score will go up and you will find it easier to get new credit at attractive interest rates.
Frequently asked questions about bad debt
If you have bad credit it's because you have bad debt. Here are FAQs that will help you understand the relationship between bad debt and bad credit.
Q. What is bad debt?
According to the online encyclopedia, Wikipedia, “a bad debt is an amount owed to a creditor that is unlikely to be paid and which the creditor is not willing to take action to collect because of various reasons”., However in the case of personal bad debts most lenders will batch them up into a portfolio and sell to a debt collection agency or a private collection law firm. They generally sell debts for about 25% of their face value. If you had a $1000 debt it might be sold for $250 or much less.
Q. How long will a bad debt stay in my credit reports?
A. Bad debts will stay in your credit reports for seven years from the time you last made a payment on it or when you occurred the debt. This is what starts the seven-year clock. Your debt could be sold over and over and this won’t change the seven-year clock. The only good news is that bad debts typically decline in importance as the years go by. In other words, if you incurred a bad debt last year it will have much more of an impact on your credit than if it was six years ago.
Q. Who buys bad debt?
Debt collection agencies are who buys bad debt but so do private debt collection law firms. They generally purchase large portfolios delinquent or charged-off debts from credit card companies or even other collection agencies. They typically buy debts for pennies on the dollar. In other words, they might pay $25 for a $500 debt. A debt buyer can collect the debt itself, use the services of another collection agency, repackage and re-sell portions of the debts purchased or a combination of these options.
Q. How bad is debt settlement for your credit?
A. Debt settlement may not have a negative effect on your credit if you settle the debt yourself although this will depend on how your lender chooses to report it to the credit bureaus. But if you use a debt settlement company that requires you to stop paying your lenders and send the money to it instead, your credit will take a serious hit. The harsh truth is that anytime you pay less on a debt then what you owed, your credit will suffer.
Q. Are student loans considered to be bad debt?
A. Student loan debts are the very worst kind of bad debt. For one thing they can’t be discharged even by bankruptcy. But even more important our government is deadly serious about collecting on student loan debts. If you default on a student loan debt, the consequences will be serious. There will be collection fees added to your debt that will be anywhere from 18% to 40% of your outstanding balance. Your wages could be garnished and your income tax refunds taken to repay the debt.
Q. What our bad debt write-offs?
A. A bad debt write off is when the lender treats the debt as uncollectible, writes it off on its books and then uses it to help offset its income taxes. As you might imagine this can actually be a good thing for lenders. However, just because a lender wrote off a debt doesn't mean you don't owe it. A bad debt will stay in your credit reports until you either pay it off or it falls off your credit reports after the seven-year period mentioned above.