If you have really bad credit or really good credit, you probably already know it. But there's this huge middle area where your score is too low to get the best deals. If you want to get a new credit card, take out a loan at the car dealership, get a mortgage to buy a home or borrow money for some other purpose, the quality of your credit score makes a serious difference.
If the valuation is poor, few banks will take a chance on you; those that do will offer you their highest rates. A bad credit score can also increase your insurance premiums or cause insurers to reject you altogether, and it can stand between you and the apartment you want to rent. Negative items on your credit report can even affect your ability to get certain jobs. Even a mediocre score will raise rates compared to those offered to people with excellent credit.
Let's take a look at what counts as a bad credit score, how you got there, and what you can do to fix it.
Credit scores, defined
A bad credit score is a FICO score in the range of 300 to 620. Some score charts subdivide this area and call "bad credit" a score of 300 to 550 and "subprime credit" A score of 550 to 620. Regardless of the label, you have trouble getting a good interest rate or getting a loan at all with a credit score of 620 or lower. In contrast, an excellent credit score falls in the 740 to 850 range.
Credit behaviors that hurt your score
Borrowers with poor credit usually have one or more of the following negative items on their credit reports:
– Payment Repayments
– Depreciation
– Purchases
– Foreclosure
– Short sale your property
– in place of foreclosure
– Bankruptcy
FICO credit scores are based on five broad categories of credit behavior, some of which affect your score. Other.
Your payment history counts for 35% of your score. So if you miss your payment deadlines, it will hurt your score. Being 31 days late is not as bad as being 120 days late, and being late is not as bad as not paying for so long that your creditor sends your account to collections, deducts your debt, or agrees to settle your debt. owe less than you owe.
How much you owe in relation to your loan is another important factor that accounts for 30% of your score. Let's say you have three credit cards, each of which has a credit limit of 5.000 $ has, and you have charged all of them to the maximum. Your credit utilization is 100%. The scoring formula looks most favorable to borrowers whose ratio is 20% or less.
Less important is the length of your credit history, which accounts for 15% of your score. You don't have much control over this component.Either your credit history goes back several years or it doesn't.
The number of new credit accounts you have is 10% of your score, which means applying for new credit to move your debt around could hurt your score. On the other hand, if moving your debt means getting a lower interest rate, which will help you get out of debt more easily, new credit could ultimately help your score. (To learn more, read 0% Balance Transfers: Who Really Benefits?)
The type of credit used counts for 10% of your score. If you have an auto loan, a mortgage and a credit card – three different types of credit – it can mean a better score than if you only have credit cards. Do not worry about it. Applying for different types of credit to try to improve your score will have little impact and will get you further into debt – not what you want if you have less than stellar credit. Focus on paying off your balances and making your payments on time. (For options to improve your credit score, read 7 tips to bounce back from a credit score disaster and 3 easy ways to improve your credit score.)
Information that won t directly hurt your score
You might be glad to know that the following things don't directly affect your credit score:
– Your income. It doesn't matter if you make $12, 000 or $120, 000 a year as long as you make your payments on time. Having a low income doesn't mean having bad credit.
– Your address. If you live in a bad neighborhood, you won't get a bad credit score, nor will living in a prestigious neighborhood give you a good score. If you own a home, its value also doesn't affect your score.
– Your participation in a credit counseling program. Signing up to manage your bills will not hurt or improve your score. It is the specific steps you take under this program that will affect how you score.
– Your race. Even though someone can easily guess your race based on your name, FICO does not factor race into your credit score.
– Your marital status. Your credit report does not indicate whether you are married or divorced, nor does it take this information into account in your score. Marriage could indirectly lead to a good credit score if there are two incomes that make it easier to pay bills you've been struggling with – or it could leave you with bad credit if you marry someone financially irresponsible. Divorce can indirectly hurt your credit score if it damages your finances, but again, marital status will not directly affect your score.
– The interest rate on all your loans or credit cards. Whether you pay the standard rate of 29.99% or an introductory rate of 0%, the scoring formula doesn't matter. (Read Understanding Credit Card Balance Transfers and Shuffle Away Your Debt with Balance Transfers to learn more.)
Is not a credit bad credit?
While not technically bad because it likely means you have no debt, no credit history and no credit score can make it harder to rent an apartment, open a credit card account or get a loan.In many cases, you can work around your missing score by using alternative methods to prove your financial responsibility. For example, if you want to get a mortgage, you can submit a history of timely rent and utility payments with your mortgage application. (To learn more, read The Path to the Worst Credit Score Ever .)
Effects of a poor credit rating
If you are able to get approved for new loans at all, credit score means you pay significantly higher interest than someone with an excellent score. The consumer credit counseling agency Springboard reports that in January 2014, a consumer with a credit score of 300 to 550 could pay 9.5% for a mortgage, 18.9% for an auto loan and 28 9% for a credit card. Borrowers in the 550 to 620 subprime category didn't fare much better, except for credit card fees, where they could pay 19.8 percent. In the meantime, a consumer with an excellent credit score of 740 to 850 might expect 3. 9% for a mortgage, 5. 1% for a car loan and 7. 99% to pay for a credit card.
The higher interest rates you pay when you have bad credit mean higher monthly payments and a lot more money spent on interest in the long run. You may also pay higher premiums on auto and homeowners insurance policies. It's hard to improve your finances under these circumstances. (For related reading, see credit cards for people with bad credit .)
Tips for improving a bad credit score
There are some extreme ways to try to increase your credit score, but not everyone can use them and they might even backfire. Here are some simple steps you can almost certainly take to improve your score.
1. Make at least the minimum payment on time and on each account. You may not have cash to pay off your balances or even make a dent in them, but if you can make at least the minimum payment by the end of the term each month, this will improve your score.
2. Try to fix significant errors on credit reports. If there are negative items on your three major credit reports, follow the credit bureau steps to try to get those items removed. This process can be frustrating and even futile, as Kiplinger writer Jessica Anderson found out when she went through the process, but it's worth it to work out bugs.
3. Talk to your creditors . If you're having trouble paying off your debt, see if you can work out a more favorable arrangement with your credit card companies or lenders. Make sure you get an agreement in writing. Be aware, however, that some arrangements can hurt your score. Your credit card due date is changed to five days after you receive your paycheck, for example, your score won't be affected, but your creditor will be made to reduce your loan balance. (To learn more, read . Will a debt settlement program affect my credit score? )
You will probably want to track your credit score to see if your efforts are making a difference.To stay up to date on changes in your credit score, consider using one of these top websites for checking your credit scores. You don't have to sign up for a paid credit monitoring service or pay your score. Just make sure you understand the limitations of free credit scores.
The Bottom Line
The end game is not really about improving a triple-digit number, but about correcting the problems that have put you in a difficult financial situation. It's about taking action to have more options and more peace of mind when it comes to your personal finances and life. In the long run, it does not have a 740 credit score, but no debt and money in the bank you can achieve these goals.