Credit is recorded and recognized when income is earned. But the credit will become bad when the borrower fails to repay this loan within the fixed period of time.
Reasons of Bad Credit: There are a few reasons of bad credit. Why people fail to repay their loan is described below.
The first and common reason of bad credit is the loss of job. Whenever any person losses his job simultaneously his income also stopped, but expenses remain the same. In some cases it may go up.
The second reason of bad credit is the sudden death or illness. When a person becomes seriously ill, his unpaid hospital bill may turn over to collection agencies.
Another devastating cause of bad credit is the death of spouse. The loss of a spouse reduces not only income of other partner but also increases expenses. Medical bill, funeral expenses have to bear the other obligator of the defaulting debtors.
Another common cause of bad credit is divorce. Either of the spouses is supposed to bear the expenses of child. As a result his expenses go up. Legal fees for getting a divorce and custody battles may also influence even the most barriers of finances.
The credit becomes bad due to the financial irresponsibility of a few people. They forget about the cut your coat according to your cloth. They buy a lot of things over their financial capability.
How to overcome bad credit: In order to overcome bad credit the following steps should be taken.
The main objective of a bank is to ensure that its loan is recoverable. The bank must secure the loan with assets. Collateral gives lenders the ability to take the asset if the loan is not repaid.
Most loans require down payment varies from 20 % to 30%. If the down payment is increased by doubling or tripling the borrower will show the loan officer that he is serious ablaut his loan.
In order to avoid the bad credit the lender should make a co- sign of another person having good credit score with the main borrower on loan application.
The lender should be careful about the borrower before investing the money. They should not give loan to the persons who are unemployed or the persons whose job is less secured.
From the above discussion it can be said that the lenders should take into consideration why the borrowers fails to repay. Whether it is intentional or not? If it is intentional then the borrowers should be black listed so that he cannot take loan from other institution. On the other hand if it is not intentional that means due to unexpected event then they should consider for future loan.
Hi I’m John Russel, finance writer from Manchester, UK. My passion is writing articles on numerous topics, for example, business bad credit, finance, and some other topics.