If you really have bad credit or great credit, you probably already know that. But there is a huge middle zone where your score is too low to get you the best deals. Whether you’re looking to get a new credit card, take out a loan from a car dealership, get a mortgage to buy a house, or borrow money for other purposes, the quality of your credit score makes a big difference. .
Key points to remember
- If you have a bad credit rating, you will usually pay higher interest rates on loans and credit cards, and you might have a hard time getting them.
- A bad credit score can also increase your insurance premiums and even hamper your ability to rent an apartment or find a job.
- Your credit score is determined by a number of factors, the most important of which is whether you pay your bills on time.
Why credit scores matter
With a bad score, few banks will take a chance on you. Those that do will likely only offer you their highest rates. Even an average score can drive rates higher than those offered to people with excellent credit.
A bad credit score can also increase your insurance rates or cause insurers to reject you altogether. It can be placed between you and the apartment you want to rent. Negative elements in your credit report can even hurt you when you apply for a job.
Let’s take a look at what is considered a bad credit score, how you were able to make it happen, and what you can do about it.
Do you have good or bad credit?
Credit ratings, which can range from 300 to 850, takes into account a number of factors in five areas to determine your solvency: your payment history, current debt level, types of credit used, length of credit history, and new credit accounts.
A bad credit score is a FICO score in the range of 300 to 579. (FICO stands for Fair Isaac Corporation, the company behind the most widely used credit scoring system.) ‘credit a rating of 550 to 620. Regardless of the labeling, you will have a hard time getting a good interest rate or getting a loan at all with a credit score of 620 or less. In contrast, an excellent credit score is between 740 and 850.
Things that can hurt your score
Borrowers with bad credit typically have one or more of the following negative items on their credit reports:
Your payment history counts for 35% of your score, so missing your payment due dates seriously affects your score. However, being 31 days late isn’t as bad as being 120 days late, and being late isn’t as bad as not paying for so long that your creditor is sending your account to collection. debits your debt or agrees to settle the debt. for less than you owe.
Another important factor is how much you owe against the credit you have, accounting for 30% of your score. Let’s say you have three credit cards, each with an amount of $ 5,000 Credit limit, and you’ve maximized them all. Your credit utilization rate is 100%. The rating formula is more favorable to borrowers with a ratio of 20% or less.
To keep their credit utilization rate at a favorable rate of 20%, a person with $ 15,000 of available credit should aim to keep their debt below $ 3,000.
The length of your credit history counts for 15% of your score. You don’t have much control over this component. Either your credit history goes back several years or it isn’t.
The number of new credit accounts you have counts for 10% of your score, which means that applying for new loans to shift your debt could hurt your score. On the flip side, if transferring your debt gets you a lower interest rate and helps you get out of debt more easily, new credit could ultimately boost your score.
The types of credit you use count for the remaining 10% of your score. If you have an auto loan, mortgage, and credit card (three different types of credit), that can mean a better score than if you only have credit cards. Again, don’t worry too much about this one. Applying for different types of loans to improve your score will have little impact and will only put you in more debt, which is not what you want if your credit is below average. Instead, focus on paying off your balances and making payments on time.
Things that won’t directly affect your score
You may be happy to know that the following factors do not have a direct impact on your credit score:
- Your income. It doesn’t matter if you earn $ 12,000 or $ 120,000 a year, as long as you make your payments on time. Having low income doesn’t necessarily mean having bad credit.
- Where you live. Living in a bad neighborhood won’t give you a bad credit score, and living in a prestigious neighborhood won’t give you a good rating. If you own a house, its value does not influence your score either.
- Participate in a credit counseling program. Signing up for help managing your bills doesn’t hurt or help your score. It is the specific actions you take under this program that will influence your assessment.
- Your race. Even though someone can guess your race from your name, FICO does not factor race into your credit score.
- Your marital status. Your credit report doesn’t show whether you’re married or divorced, and it doesn’t factor that into your score either. Marriage can indirectly lead to a good credit score if having two incomes makes it easier to pay the bills you struggle with, or it can leave you with bad credit if you marry someone who is financially irresponsible. Divorce can indirectly hurt your credit score if it hurts your finances, but again, marital status will not directly affect your score.
- The interest rate on one of your loans or credit cards. Whether you’re paying the default 29.99% interest rate on a credit card or a 0% introductory promotional rate, the scoring formula doesn’t care.
Does No Credit Mean Bad Credit?
Not having a credit history or credit score, as you might have if you have just graduated from school or have just moved to the United States, does not mean you have “bad” credit. . However, it can make it more difficult to rent an apartment, open a credit card account, or obtain a loan. In many cases, you can work around your lack of score by using alternative methods to prove your financial responsibility.
If you want a mortgage, for example, you can submit a timely rent and utility payment history with your mortgage application. Or, if you don’t qualify for a conventional credit card, you can apply for a secure credit card, which after a certain time may qualify you for a conventional contract.
3 tips to improve a bad credit score
Here are some simple steps you can take that will almost certainly be improve your score overtime.
1. Make at least the minimum payment on time, every time, on every account. You might not have the cash to fully pay off your balances or even seriously damage them, but if you can at least make the minimum payment before the deadline each month, it will improve your score.
2. Try to correct major credit report errors. You can get your credit reports once a year, free of charge, from the three major credit reporting agencies (Equifax, Experian and TransUnion) on the official website for this purpose, AnnualCreditReport.com. The reports of the three agencies may differ somewhat, depending on the information they collect. If you find an error on any of them, you can file a “dispute”, following the steps outlined on that agency’s website. The agency is then required to investigate the matter and report back to you. For additional help spotting errors on your credit report, consider taking advantage of one of the best credit monitoring services.
3. Speak with your creditors. If you’re having trouble paying off your debt, see if you can find a better deal with your credit card companies or other lenders. Make sure you get a written agreement. Be aware, however, that some arrangements may affect your score. Asking that your credit card payment due date be changed to five days after receiving your paycheck, for example, won’t hurt your score, but asking your creditor to reduce your loan balance on will.
The end of the game here isn’t just to improve a three-digit number, but to correct any issues that might have put you in financial trouble in the first place. In the long run, it’s not about having a credit score of 740, as good as that may be, but about controlling your debt and being able to focus on your financial goals for years to come. If you need additional help removing negative scores from your credit report, the best credit repair companies can speak on your behalf with the three major credit reporting agencies.