Your credit score reflects how potential lenders see you. It is a number in the range between 300 and 850 that is designed to indicate the likelihood that a consumer will repay a loan on time. The higher the number, the better as a poor credit score can bring you a lot of difficulties in life. However, there are ways to rebuild it.
1. What Is Considered a Bad Credit Score and What Makes It Bad?
A credit score below 669 is considered to be fair and below 579 is very poor. This group is referred to as those who would have a hard time repaying a loan. Having such a score can make it difficult to obtain a loan on normal repayment terms. However, there are lenders that specialize in such loans. If you fall into this category, you can expect to pay much more in interest rates, sometimes even double the going rate for borrowers that have good credit scores.
Many factors can affect your credit score both directly and indirectly but here are the main ones.
Your payment history
Not paying your bills on time or not paying them all literally flushes your credit score down the drain. When a creditor sees you do not intend to make payments, they go after you by charging off your account or send a judgement your way. Although a paid judgement is better than an unpaid one, this behavior sends a clear message that you are a credit risk. Bankruptcy literally destroys your score.
The score considers how much credit you are using of that which is available to you. This credit utilization ratio is based on the amount you owe on revolving credit such as credit cards compared with the total amount of credit that you’ve been extended. The more you owe relative to your total credit limit, the more it threatens your credit score. In general, always try to maintain a ratio less than 30% as top scores come with a credit utilization ratio of only 6%.
2. How Poor Credit Score Can Affect You
A poor credit score can create many roadblocks and obstacles throughout your life
Higher interest rate
Lenders will need to make you ‘pay’ for the higher amount of risk.
Reducing your odds of being approved for a loan or a mortgage
Some lenders don’t even want to consider candidates with poor credit scores.
You could miss on many opportunities
Poor credit score also increases the risk of being turned down for a job, an apartment of even a cellphone contract.
A utility company might ask you for a deposit
Some electric companies require a deposit to start service if you have a bad credit score even if you paid all your bills on time with your prior provider, leaving you with the option to either have to pay the deposit or look for light companies with no deposit that might come with a higher rate.
3. Rebuild Your Credit With These Simple Tips
Make improvements to a few key credit management habits, and over time, your score will improve.
Figure out where you stand
In order to tailor a score-improving strategy, you need to know exactly what needs to be fixed.
You can calculate your credit score for free.
Build better credit habits
Your payment history is the most important factor so you need to eliminate late payments entirely. Basically, you need to alter any poor habits that led to you a poor credit score in the first place. Create a budget to ensure you can cover your expenses, set reminders to make your payments on time and stick to your budget.
Pay down debt
Paying off debt like credit card debt will reduce your credit utilization ratio and improve your score. A big part of credit ratings, besides payment history, is available credit from existing sources.
A poor credit score can be compared to a bad grade in school. But, just because you failed an exam doesn’t mean you can’t take it again and do better. No matter how bad things may seem, there are always ways to improve your credit score and ‘fix your grade’ so you earn the right to attain better deals and more options. Fixing your credit score isn’t easy and it will take time as you need to show that you have what it takes to attain a good score.