More and more people are growing concerned with their credit scores because they are scared of the impact it can have on their lives. It can have major repercussions and hold a lot of power in people’s lives, especially in the event of not being able to find a job. However, to some degree, this is an overreaction since we only need a credit score of 720 or higher to secure an affordable car loan or home loan. Nevertheless, bad credit is a thing of the past because the services of the credit bureaus are changing. But what exactly is a credit score in simple words that leads towards bad credit or good credit?
What is Credit Score?
A credit score is what major financial institutions, such as banks and credit card companies, use when determining whether to lend money or grant a card or a loan to you. The score comes in two grades: a Fair credit score (FICO score ranges from 300 to 850) and a poor credit score (also ranges from 300 to 850). The lower the score the more risk you are at to the bank.
What is Bad Credit?
A bad credit score is given to people with a payment history that’s less than average. This is often the result of previous credit problems and payment delinquencies. If you’re still paying off debt or recovering from past situations, it might be time to put a more positive image on your credit report. Bad credit, also known as “pre-dispute credit,” is when someone’s credit score drops due to their unpaid bills, due to financial stress, or other reasons that are outside of their control.
Bad credit scores can have a negative impact on the ability to get mortgages, credit cards, car loans, and other loans in the future. For some people, it’s caused by a short record with a few small, unpaid debts. In other cases, it’s due to larger bills with larger penalties or charges. If you don’t have a good payment history, this can make the process of building good credit harder. You may be able to improve the situation, though.
In a survey done by PlayCore, 39 percent of respondents reported that having a bad credit score is the worst thing that can happen to someone, and one in four respondents said it had affected their daily lives. According to a report by CNN Money, a credit score can be used to determine the interest rate you will pay when borrowing money from a lender.
So, what can you do to improve your credit? You can start by taking steps to reduce credit card debt. In addition, you can also work to build up your credit score by making on-time payments on all debts.
How Does Bad Credit Impact Your Credit Score?
According to Money Expert Contributor Chris Hogan, who also provides expert credit score calculations, credit scores can be negative if:
- You have a high balance on your credit cards.
- You have been late making payments on a credit card.
- You have credit inquiries from three or more creditors.
- You have missed several monthly mortgage payments.
- Your bankruptcy is on your credit report.
- You have been denied credit or charged more than the minimum due.
- You have stopped making payments on a loan.
- You have a collection account on your credit report.
- You have been sued in the past for unpaid debts.
- You have gone to collections for a bill and have not made good on the debt.
- You have been sued and lost and you do not have insurance to cover the judgment.
- You have a collection account that has been open for more than six months.
- If you have filed for bankruptcy, you do not have to pay the judgment.
- You have been denied a loan and have not been able to obtain one since.
- You have a judgment for more than $50,000.
- You have negative reporting on a credit report for more than six months.
- You have had negative reporting for more than 12 months.
It is recommended that you maintain a positive credit report and that you use a credit card only if you intend to pay off the debt and if it is within your means.
Opinions about Bad Credit
There are two major credit bureaus:
- Experian – this is the original bureaus with the lowest scores
- TransUnion – an offshoot of Experian.
The bureaus, particularly TransUnion and Experian, receive a lot of bad press and their reputation is generally negative. However, we think that they are the ones who are changing their policies in order to do better. The most obvious change that they make is how they report a bad credit score. Their formulas are simple:
- A negative credit score leads to no lower credit score
- A good score leads to a higher score
If you have a Fair score of 719 and a Negative score of 799, you can improve your score by:
- Paying off any delinquent credit card debt.
- Improving your income situation.
- Paying your utilities on time.
- Paying on any mortgages, student loans, etc.
- Improving any income source such as a part-time job.
- Having a stable work situation and income.
- Having no unsecured debts and not using a credit card at all.
- You can also try paying your utility bills early to avoid interest and/or penalties.
- Paying your mortgage on time.
- Improving your income situation by reaching a part-time job or maybe going back to school.
The Cost to Repair Your Credit
If you are serious about improving your credit score, you need to have two things:
- Mortgage or utility payment history.
- Credit card payment history.
Your goal should be to get your mortgages paid off in full as quickly as possible or get utility bills paid in full as quickly as possible. In fact, your utilities or mortgage will be on a “to-do list” to be paid as soon as possible. A mortgage is usually paid off in 12 months (other than a vacation home which can take less or more time to pay off). You may want to take longer if the payments are high. After having paid a mortgage off in 12 months, you must wait a full 24 months before applying for a mortgage again.
Having a good credit history will help you to qualify for a mortgage or a better credit card. However, you should be wary that having a good credit history does not guarantee to get a better or better loan. There are a lot of factors to take into account. If you need a mortgage, be aware that if you have bad credit, it will hurt your chances. Even if you have a lower credit score than a person with a perfect credit score, it can affect how much of a loan you can qualify for.
On the other hand, it is possible to apply for a loan for a good credit score and then not get it. My opinion is that if you are going to try and get a loan, get a good credit score. There is nothing worse than having a lot of debt and then applying for a loan and getting rejected. One of the advantages of credit cards is that they can be paid in full on the due date every month. However, you should only use credit cards when you have the money in your account. If you can pay cash, do so and use your card for emergencies.
Let’s say you have a Fair credit score of 719. If you need a loan for $1,000 and are approved for a $1,000 loan, but have no existing mortgage or utilities to pay, you will be charged a $50 application fee.
Mortgage: $50 – You will have to pay $1,000 for a $1,000 loan.
Utility: $50 – This is to pay a bill. You must be at least 18 years old, and show proof of income (i.e., W-2 form).
How to Improve Bad Credit
To improve your credit score, pay your credit card bills on time. Don’t close or lower your credit card accounts, unless there is an error. Do not apply for new credit card, unless you have no credit cards at all. And, if you are asked to be an authorized user on someone’s credit card, don’t do it! It looks bad.
If your credit card debt is large (over $10,000) and you are trying to repair your credit score, you might be able to negotiate with the credit card company to reduce the interest rate. Just make sure that you won’t be paying interest on the remaining debt.
You can also use credit repair services. There are a lot of those out there, but remember that each one of them promises to increase your score by a certain number, and how much their score will increase is based on other things they do. It’s a matter of trusting them or not. So, always take advantage of free credit score reports, as they are typically accurate.
The reason that many people don’t do anything about their credit score is that there is a lot of junk information in it. The best way to improve your credit score is to not put anything in it that is not absolutely necessary to the existence of your credit score. You should never report to a credit bureau anything that you do not need to.
Look for the following data to get out of credit reports.
- Student Loans. This is the main source of bad credit and should be purged completely from your credit report.
- Hospital and medical bills. These are the easiest to identify, and they should be purged.
The FICO score formula considers many different factors to come up with a score. Many of the things on your credit report are unlikely to impact your credit score in any way. A good score is 690 or better.
We know that it can be confusing trying to deal with a bad credit score. If you want to change your credit history, you need to make it worth it for the credit bureau. You can improve your score by following these steps:
- Keep your credit card balances low. Try to pay off any and all unpaid balances every month. If you have a bad credit score, you may be paying more than the balance is worth.
- Get rid of any delinquencies that may have occurred within the last six months. Only keep things on your credit report that are in good standing.
- Have a bankruptcy, foreclosure, or tax lien from within the last seven years removed from your credit report. The credit bureau may deny a loan to someone with this on their credit report.
- Never miss a payment on your credit cards.
- Avoid opening new accounts. Keep your credit cards to one account per card.
- Get your free credit report every year to see what they say about you.
- Only use credit cards if you pay them off at the end of the month.
- Revoked credit does not affect your credit score in any way.
- Have a co-signer on any loan.
- Use a secured card with a low credit limit and pay it off on time every month.
- Pay back credit cards in full every month.
- Check your credit score every two months to make sure that you don’t have any late payments.
- Make sure that you use as many positive payment history items on your credit report as possible.
You must work at improving your credit. It will be difficult to change all your negative items, but doing one small thing every month can make a big difference.
We hope that these tips have been useful. Even if they weren’t, you can go to Bankrate.com for a free online credit score. Bankrate includes all three major credit bureaus and provides information about other financial products such as interest rates on mortgages, insurance, and loans.
A bad credit score is something that people pay for. But, if you have no other option, taking action might just be the right thing to do. Don’t ever put something in your credit report that is not absolutely necessary.
Try out one or all of these great free credit score checkers!