Have bad credit? You're not alone and many more folks will be in the same boat very soon, thanks to plunging housing values, unemployment, and neighborhood blight. Consider that even folks who would have sold off their firstborn children rather than pay a bill late are finding they have little choice in the matter. No job, no way of selling an underwater home without a mortgage lender's cooperation, and no way to continue paying a mortgage. Nine of ten short sales fall through. The vast majority of trial mortgage modifications don't make it to the permanent stage, and of those that do, only half stick.

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So when you end up with a deed-in-lieu, a foreclosure, or a short sale on your credit history, you can be sure of paying more for financing for years in the future. Even if you had paid all bills on time before, future lenders will view you as a sub-prime borrower, which makes obtaining loans difficult. It can increase your insurance premiums and even cause you to be turned down for a job. Now multiply that effect by millions of folks across the country. Although a short sale or foreclosure might let them put their housing problems behind them, millions will be dogged for years by a credit score that will cause lenders to avoid them. If they are able to obtain loans, high interest rates are likely to strain their budgets.

According to the Chicago tribune, "the effects may well be a drag on the nation's consumption, and the economy as a whole, for a decade or more."

So, now that we know that the credit scoring methods lenders relied on were so ineffective at picking out who would and who wouldn't default on mortgages, will things change? Many bankers now say the over-reliance on a simple credit score did not work well for lenders or borrowers.

A New System?

Firms like Moody's Analytics are trying to sell a new credit scoring system that considers other factors that could influence a borrower's likelihood of default -- for example, a new system that reduces credit scores during economic booms.

The idea is that in good times, people appear to have sweet credit scores because anyone can pay bills when money is flowing in. They can borrow against home equity and pay off credit cards rather than responsibly refraining from running up balances in the first place. So paying bills during good times is less indicative of good financial judgment and discipline than doing it in bad times. So under this model, in a recession bad payment history is scored more leniently, and good payment records weighted more heavily.

What You Can Do

If you are lucky enough to have a job, start paying your bills, on time. In the new world, it will be worth more because the economy is bad. Pay down your balances to zero, and then pay off your credit cards each month. If you're in trouble with your mortgage, hang in there until you get a modification -- the damage to your credit is less than with other solutions. If possible, get your mortgage current before starting a trial modification program. That way, you won't be reported late month after month while in the modification process.