Many people think that having bad credit is always someone’s fault. In today’s economic environment, foreclosures are happening right and left and the job market is the worst since 1983. As a result of this crisis, the number of people with bad credit (not just a few missed payments) is increasing.

Yesterday I listened to a radio program where a financial consultant was interviewed about money and credit problems. One of the pieces of advice given was that people should have 6 months of living expenses in savings (which has been the standard advice for the last 20 years). It’s not bad advice – in a good job market. What about people who have been out of work for more than 6 months?

I know people with colleges degrees who have been out of work for a year, and have exhausted all of their savings (many of them having the recommended amount equal to 6 months living expenses). These same people who would never have thought to get into their 401Ks, in desperation have cashed out their retirement savings as well. The next step when completely out of cash, some people will start living off of their credit cards. And you know where this path leads.

It’s not just tough economic times that can lead to unintended debt and bad credit. There are many other situations which can cause your credit score to spiral down:

• Divorce. If you agree to split joint loans with your ex and they don’t fulfill their obligations, you could wind up with late pays on your joint accounts, despite what the divorce decree says.
• Medical bills. I’ve heard horror stories from many about health insurance policies which don’t cover hundreds of thousands of dollars in medical bills. Even the so-called catatrophic insurance plans might not cover expensive cancer treatments, or coverage runs out for people who need long term care because of the result of an accident.
• Identity Theft. Sure, credit laws are supposed to protect you, when it comes to identity theft, but you can get snagged in a long fight to clear your name if someone succeeds in hijacking your identity to receive financing. Sometimes, you don’t even know what’s going on until you get a “late pay” letter from a creditor or collection agency. Situations like this are why we recommend you pull your credit report twice a year.
• Credit Report Errors. If you have a common name, or if you have the same name as a parent, your file can get merged with another person’s file. This is great if you have bad credit and they don’t, but bad if the reverse occurs. Often it can take several rounds of letters to the credit bureaus or threats of lawsuits to straighten things out. Murphy seems to work overtime in these situations – you’re trying to close on a loan and need things to happen ASAP and this is when you find out about the glitch on your report. Credit reporting errors discovered at the last minute can be HIGHLY inconvenient.

What’s tough about excessive medical bills or having a deadbeat ex is the person drowning in debt sometimes doesn’t legally qualify for bankruptcy under the revised 2005 standards. The biggest obstacle is the that they make too much money – not enough money to pay their bills, but too much to qualify.

I guess the moral of the story is to not judge someone too quickly, but isn’t this always the right advice?

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