Bad Credit – Fix it or wait it out?

You have bad credit. But what do you fix, how much credit should you fix, and how fast should you fix it?  But the question remains as to bad credit – fix it or wait it out?  Derogatory or bad credit is probably the top decline reason for all loans.  Sometimes credit should be fixed, and sometimes it should not. The premise of always fixing bad credit needs to be reviewed.

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Bad Credit – Fix it or wait it out?

Cases when damaged credit should not always be fixed

Faq Frequently asked questions on fixing bad credit or not

Should I fix my bad credit or wait for it to drop off my credit bureau by itself?
Try to fix your bad credit now instead of waiting for it to drop off.
How do I fix my bad credit?
Get a copy of your credit report. Look to see if there are any mistakes or errors on your report. This includes the status of your account, the number lates and the amount shown as what you owe. If you believe any of those items are wrong then you can dispute the item with the credit bureau. If the disputed item is not resolved by the creditor to the credit bureau the it typically is removed from your credit file.
How much higher can I get my credit score?
That depends on how many reporting mistakes are on your file. In many cases the score
can be increased 50 to 100 points within a few months.

Joint Accounts

You have joint accounts with someone and they are not paying them. Have a conversation with them.  Trying to fix that bad credit right away is premature.    If a Partner or Spouse was responsible for paying an account and does not, it will damage your credit if it is a Joint account.   There may have been a household verbal agreement that the Partner or Spouse was responsible. That does not matter on the credit report.   Late payments will show up for both of you.

Other questions first need to be addressed. Will you stay with your Spouse or Partner and are they communicating and working with you on the non-payment?
If you are not working together, then there is not much point to try fixing the credit right away.  Closing the Account may be the first step. If they are working with you then make a plan on whether or not it will be paid, by whom and when. Decide if you want to keep the Account open. Then later, derogatory reports can be disputed.   These issues need to be handled differently if the derogatory credit issues are with a business partner.

The bad credit is already old

Bad credit, late payments, charge-off’s, foreclosures, and other derogatory items on your credit that are already 5 years old or older are not worth the cost and effort to try to remove them.  This includes 30, 60 and 90 day late reports.   After 7 years, many items drop off automatically. For those items, it does not make sense to manually try to remove them.

Bad credit - Fix it or wait it out?
Bad Credit – Should you even try to fix it?

 

Federal and State Tax liens

These are much harder to remove.  It is also much easier to pay them and get a statement of “released” placed on the bureau just below the item rather than trying to get Tax Liens removed. If you have a payment arrangement, keep a copy of the payment arrangement and provide it to anyone that will look at your credit report.  Tax Liens on which there is a payment arrangement are looked at far more leniently than Tax Liens that do not have a payment arrangement in place.

Looking at some of these issues can help you decide on bad credit – fix it or wait it out?

 

Business partner with bad credit

Today you can pick from several business loan options when you have a  business partner with bad credit.   That’s good news.   That partner can even be you!

A business partners with a low credit score will cause challenges .   Our programs are designed exactly for those businesses.    Apply below and get funding today.
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Getting a business loan

Options are more limited when applying for a business loan with a business partner that has derogatory personal credit. If the business owner with bad credit has more than a 20% ownership in the business, then most lenders will look at their credit. Some lenders will not look at credit if the ownership percentage is less that 20%. If the ownership percentage is less than 5% or 10%, more lenders will not look at the credit of those owners. If the business partner with bad credit does has closer to 50% ownership interest, then chances are much higher the request will be declined. This is especially true with more traditional lenders like banks and the SBA.

Getting a business location

Renting a location

Once a business finds a commercial location, the business owner’s credit is looked at. If the business is renting a location, the landlord will have the credit of the owners reviewed.
With damaged credit, the business may be denied for a rental request. The denial can be discussed with the landlord. If the other owner has very good credit, the landlord may make an exception based on the stronger credit.

Buying a location

If the business wants to finance the purchase of a location through a commercial mortgage, the lenders will also look at all the owner’s credit. The level of scrutiny will be higher than with a rental request.  Full financial statements will be requested. A business partner with bad credit will more likely cause a rejection in this situation than with a rental request.

Establishing business trade accounts

Almost all businesses will eventually establish trade accounts. When a trade account is requested, many companies will check the business and personal credit of the main owners. If the credit is damaged, the request may be declined. Not being able to secure important trade accounts can be very damaging to a business. This can cause the business to be short of the inventory, equipment and other services it needs to be successful.

Even if the business can secure the trade accounts it needs, the terms may be more expensive because of the business partner with bad credit. This will translate to increased costs to operate.

Obtaining Government and Private contracts

When a business bids on private or government contracts, the personal credit of the owners is reviewed. If there is a business owner with bad credit, it will be more difficult to secure these contracts. The contract request may even be denied for this reason.

Background checks

There are many reasons why a background check may be completed on the owners of a business.  Some of the reasons have already been listed. If a background check is requested, it will include a personal credit check.  Bad credit of any of the owners may be a reason for denial in a background check.

Solutions

A number of negative consequences of having a business owner with bad credit have been reviewed. If you are a business that has an owner with bad credit, all is not lost. A number of things can be done to improve, and even eliminate this problem.

Change in ownership percentage

The biggest change that can be made is lowering the percentage of ownership of the business partner with bad credit.  Those owners may not agree to this.  If they do, the ownership needs to be changed to an amount lower than 20%.  An amount less than 10% would be better. Further, an ownership percentage of less than 5% would eliminate the problem in most cases.

The solution of lowering their ownership percentage will often not be popular with many of these owners. A remedy to this is to consider other changes in the bylaws of the corporation. There are many options. The stock ownership or dividend rate can be increased. The owner can be given a higher salary.  A commission structure can be added or increased. Another option is to pay more towards their IRA. All of these actions are options to balance a reduced ownership percentage.

Change articles of incorporation

If the business partner with bad credit agrees to lowering their ownership percentage, the Articles of Incorporation should be changed to reflect this.  Many States show ownership percentage in the Articles of Incorporation.  After the Articles of Incorporation are updated to reflect the new ownership percentages, they should be submitted to the Secretary of State.

Updating the Secretary of State

The Secretary of State listing itself should be updated. The Secretary of State lists information on the company and it’s owners.  The business partner with bad credit should be removed. The owner with the stronger credit should be listed instead.

Update business credit reports

Business credit reports can be updated. This includes Dun & Bradstreet and Experian Business credit report. There is a section listing the owner’s name. This should be the owner with the stronger credit.

We receive many callers with similar requests.   Callers also call in requesting help with a “business owner with bad credit”.   Other times callers ask for help for a “business owner with damaged credit”.

If assistance is needed to prepare business plans or financial statements, the SBA Small Business Administration has excellent resources.

Can a strong Co-signer make up for a bad credit primary signer?

There is a long history in credit of using a strong Co-signer to strengthen an application. However, can a strong Co-signer make up for a bad credit primary applicant?

What is a Co-Signer?

A Co-signer is someone that signs with you on a loan request.  It is normally done when someone with stronger and better credit than you offers to sign to help you secure financing.    A co-signer is jointly liable for what they are signing for.

In general, a strong Co-signer does not make up for a bad credit primary applicant.   If the primary applicant has significant derogatory information, especially significant recent derogatory information, a strong Co-signer will in most cases not be able to help turn a decline into an approval.   A strong Co-signer does have a positive effect on an application is situations when the primary applicant is not strong enough, or has limited or weak credit, or has minor derogatory credit.
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There are several reasons why a strong Co-signer is often not helpful when the primary signer has significant derogatory credit.   Lenders know that in most cases, Co-signers sign solely to help the primary applicant get the loan.   A Co-signer normally does not intend to take a benefit by Co-signing.    Examples are parents that Co-sign for their children to help them get a car loan.   However, there are many other examples.    Sometimes another relative may Co-sign, or a friend may Co-sign just to help the primary person get the loan.    In such instances the secondary signer does not want the proceeds or asset that is being applied for.    Due to this, if the primary applicant runs into difficulty and cannot repay, the Co-signer often be very unhappy about the prospect of paying the loan because they received no benefit from it.    In the past, lenders have heard Co-signers outright tell them that they just signed the papework to help the primary person get the loan.   In some cases, the C0-signer really believes that they really will not be responsible and that the limit of their role is that the just signed the paperwork and there was nothing more to it that that.

Another main reason that lenders do not want to make loans to bad credit primary signers even with a strong Co-signer is that if the primary has a lot of recent derogatory credit, the lenders know that statistically, there is a much higher chance that the primary applicant will go into arrears and past due compared to primary applicants with limited derogatory credit and a high credit score.   Since the percentage of borrowers that go past due is higher, lenders know that they will end up going to the Co-signers asking for recourse in a higher percentage of instances than with stronger credit primary signers.

There are some loan products which are exceptions to this, but in most cases for the reasons stated above, a strong Co-signer will not help a derogatory credit primary applicant get approved for a loan that they otherwise would have been declined for.

Are credit inquiries really that bad?

September 4, 2017.  Much has changed in the world of credit inquiries in the last 25 years.  Many people believe that credit inquiries are quite and they should go to lengths to avoid them.

30 Years ago,  many people did not know what credit inquires were. In 2016 a significant percentage of the population knows about credit inquiries are.  Many believe that even one or two extra inquiries are quite harmful to their credit.    Are credit inquiries though, really THAT bad?
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In terms of credit issues that may be considered “bad”, credit inquiries are probably the least worst offenders.  Credit scores recover from credit inquiries faster than just about any other personal credit item that is considered derogatory.

When Credit Inquiries begin to hurt credit

Inquiries will have a very limited affect on a credit file if the number of inquires is small.   Credit inquiries begin to hurt a credit file more significantly if the number of credit inquires is more than about 5 in one month.    When some of these inquiries are from Car Dealers or Mortgage companies, they may not affect a person’s credit score at all.  If the number of inquiries is 5 in the last 30 days, try to minimize the number of inquires in the next 30 to 60 days.

Once an individual does have more than 10-15 inquiries within a month, as long as they go a few months without almost any inquiries, their score will recover quickly.  Their credit score will likely be close to what it was within 2 to 4 months.

In summary, are credit inquiries really that bad?    In many cases, a few credit inquiries on a credit file within 30 days have a minimal impact on someone’s credit bureau score.