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Bad Credit Reports Discourage Consumers

By Faye Mergel
Published: Sunday, September 6th, 2009

Credit bureaus keep giving bad reports. The simple reason: consumers are having more difficulty in meeting credit obligations. As a consequence, consumer credit slowed down. This is revealed by a study conducted by the National Credit Regulator (NCR). Released August 26 this year, the Regulator’s second Consumer Credit Report reveals that there is a fall of 8.64% in the total number of agreements made in the last quarter of 2008.

Bad Credit Reports Discourage ConsumersThe value of credit transactions in that same period also saw a decline. From September to December 2008, total value of new credit transactions declined by 9.08%. This is despite an increase in transactions entered from September to December of that same year. In September 2008, 2.23 million transactions were monitored by NCR. By the end of the year, it has increased to 2.40. Financial analysts say that negative items are increasing in consumer reports. Bad reports make consumers feel that they are not capable of carrying out new loans.

Financial specialists also attribute this decline in credit activities to the number of rejected applications. Creditors have raised their standards for new applications. The number of turndowns for credit, mortgage, and other loan applications has declined substantially.

Experts say that decline in credit activities has more implications than meets the eye. They expect more consumers to file bankruptcy since more refinancing applications are being turned down each year. Furthermore, consumers will become more vulnerable to scams since they will feel more desperate in fixing their scores. However, they added that proliferating credit myths are also to be blamed for bad reports.

Many consumers believe that it is better to carry a balance in their credit cards. What they do not know is that their score, which appears on consumer reports, is affected by the balance to credit limit ration. Having a bigger balance will not help in fixing ones report. Finance experts add that consumers should not blame their salary when it comes to worsening reports. While it is true that lenders look into a consumer’s income before granting loans, Fair Isaac Company (FICO) and other scoring bureaus do not factor income in their computations.

Consumers do not regularly check their credit report because they believe that it will hurt their scores. This is another myth that finance specialists want to correct. In fact, they encourage consumers to check their report annually so they can manage credits better.

They further advise consumers to focus more on managing their insurance and savings instead of planning for more loans and credit card applications. Credit specialists say that debt is not necessary when insurance can fix the problem.

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