Ultimate Guide to Fixing or Re-Establishing Your Bad Credit
Ultimate Guide to Fixing or Re-Establishing Your Bad Credit
Today’s society continues to be more and more dependent on our having good credit. From getting a credit card or loan to businesses extending credit for us to buy their products and services, we always seem to be dependent on credit to help us live our lives to the absolute fullest.
Good credit not only affects where we can buy a house but how much we’ll pay for it. Without good credit, lenders won’t even consider a person for a mortgage loan. Interest rates can be higher, or we could simply be turned down altogether.
Landlords use credit to decide whether they will rent you an apartment. Car dealers will demand cash and not give you a loan at all if you want to buy from them. And if you buy, good credit assures that you can get a larger loan amount at a lower interest rate.
Poor credit will limit all of your options. It will even affect your job search. Potential employers check your credit as a part of their hiring process. A good credit score demonstrates that you have shown financial responsibility in the past and bodes well for you when they consider you for hiring. Also, credit repair is a difficult and time-consuming process. Poor credit does just the opposite.
If you want to start a business, obtaining a small business loan requires that you have good credit. Your credit score can even affect whether you can have your electricity turned on. Many electric companies will check your credit first before giving you service. Many phone, water, cable, and even cell phone companies will do the same.
For most of us today, loans based on our credit score have become a necessary part of our lives. But there’s a lot more involved in having good credit than simply paying each of your bills off each month. Yes, that’s an important ingredient, but there’s more going on than you may be aware of.
Your credit score
Lenders look to your credit score to indicate to them just how likely you will be to repay a debt when they consider you for a loan. The higher your credit score, the more likely it is that they will qualify you for a loan. A higher credit score also helps you obtain the most favorable interest rate, whether you’re buying a home, car, or products from a department store.
Your payment history
Your payment history is the most important component in making up your total credit score. Whether you’ve paid your bills on time or not, or if you’ve ever missed a car payment, your “payment history” has the largest impact of all on your credit score, counting for between 30 and 40 percent of your total credit score.
Your credit utilization ratio
Other factors are also critical. Your “debt-to-limit” ratio, or credit utilization ratio, also can significantly affect your credit score. This is a mathematical comparison of all your total debt balances compared against your total credit limits. It’s derived by adding up each of your credit card balances plus your credit limits and then dividing the result by your total limit.
When you have a high utilization ratio, it indicates that you’re using your credit more than what’s considered an acceptable amount and that your risk of default is higher than normal.
Even when you don’t miss any payments and make the minimum payment each month, a high balance compared to your credit limit means that you’re susceptible to defaulting on all your debts, and if one large unexpected debt hits you, it may force you over the edge into default.
The credit scoring systems also take a look at each of your individual accounts. When you have an extremely high balance, even if it’s on only one credit card, it tells them that there’s more risk involved with your account than usual and your credit score can be negatively impacted, although this will affect it less than your utilization rate. The lending institutions believe that when you charge one card to the limit, the others may soon follow.
Credit History length
Your credit history, or how long you’ve had credit, is another factor. When your credit history is very short, it gives the lenders less of a base to judge how you manage your credit, so this can also cause you to have a lower credit score.
Any combination of these issues can tell lenders that you are a higher than average credit risk and give you a lower credit score, even if all your monthly payments have been made right on time.
The simplest way to see what specifically is affecting your credit score is to get a copy of your credit report. It provides a detailed explanation of what is being positively and negatively impacting your credit score and tell you what you need to do to get your credit score back to where you’d like it.
How do lenders find your credit score?
Lenders make credit decisions by checking one or more of the three major credit bureaus, Experian Equifax and Transunion. Another organization, FICO (The Fair Isaac Corporation) was the developer of the first algorithm that assigned numbers from 300 to 850 to gauge their creditworthiness.
Some lenders make their credit decisions based on the borrower’s FICO score while others use data from one or more of the credit bureau reports.
Lenders will also look at more than just your credit score. When you borrow money, even a good credit score will not guarantee approval or even a good interest rate. Credit scores reflect your credit history and allow lenders to gauge whether you are likely to repay the money if they lend you credit.
Borrowers, however, can be deep in debt and still have an excellent credit score if they regularly pay their bills on time. And even though income and other debts are key factors in lending decisions, what you already owe along with what you earn (and your assets) also are important factors.
How close are you to your limit?
The less you use of your available credit the better it will be for your credit score. Generally, it’s recommended not to use more than 30% of your card’s available credit or it will negatively impact your credit score. One way to avoid this is to make more than one payment each month so that charges coming in are offset by additional payments.
Applying for a new card
Often when you find out that a new credit card is available with a low or zero interest rate or other benefits, it’s tempting to apply for it. However, applying whenever a new card appears in the marketplace can easily harm your credit score.
Whenever you apply for a new card or loan, you lose points from your credit score. If your credit score is too low for a regular card, a secured credit card may be the answer to get your foot in the door.
Is it possible to have too many cards?
In theory, there is no limit to the number of credit cards you can hold. Most credit card issuers don’t care how many accounts you have. Instead, they rely on your credit score, income, and debt-to-income ratio to make their decision to give you credit. However, you might be denied a second card from the same bank if they feel you have too much open credit at the bank. Keeping too many cards can also lead to trouble by making it easier to forget to make a payment.
Hard vs. Soft inquiries
Your credit account can be accessed by either a “soft” or “hard” inquiry. There is a major difference. A soft inquiry often occurs without you even knowing about it. If you receive a credit card offer in the mail, it’s likely that the credit card company made a soft inquiry to find out if you would qualify for the card.
Obviously, it wastes their time if they were to go to the trouble of making you an offer if you couldn’t qualify for it in the first place. The same thing can happen with other types of loan offers or when a lender wants to do a pre-approval of you for a loan.
Employers can also make a soft inquiry when they do a background check on your credit. Many employers are more comfortable hiring a person with good credit since they believe it indicates that you are responsible.
Checking your own credit is also a soft inquiry, so you should never worry about checking your credit since doing so will not harm your credit score.
A hard inquiry, or hard “pull”, does, however, affect your credit score. You will know one is being made because your consent is required. Hard inquiries are triggered when you apply for credit, such as for a credit card, mortgage, personal, business or auto loan. The inquiry becomes part of your credit report which means that anyone accessing your account information will see the inquiry.
A hard inquiry can deduct up to 5 points off from your FICO score and as much as ten on your credit bureau score. However, many inquiries about the same loan are made within a 45-day time frame and are often considered just one inquiry by lenders.
When considering a hard inquiry, be aware of your current credit score and the amount of outstanding credit you have. Don’t apply for a new card if a few points would do damage to the quality of your current credit.
Often you may wind up being “in collections” and don’t know about it. This means that you have become significantly delinquent with debt, like a credit card or medical bill, and the original lender has given up on you ever paying. They have written the debt off of their books and sold it to a collection agency. The collection agency will then contact you in an attempt to recover as much of the money due as possible.
There’s no established process that creditors and lenders use when an account goes into collection, but many credit card accounts are automatically sent to a collection agency after no payment has been received for 180 days. Either the original creditor of the loan or the collection agency can send your account to the credit bureau resulting in your account being red-flagged with the status of “in collection”.
This will negatively impact your credit score substantially. The higher your score was before the collection notice, the more points you will lose, and credit repair will take a long time.
You recently got your first loan or card
A portion of your credit score is determined by the number of months or years of your credit history. If you’ve just recently received your first loan or credit card, this will probably be the reason your credit score is relatively low.
The solution is to continue using the credit in a responsible manner. Pay your bills in full and on time each month until your credit history is more established and your credit score will rise accordingly.
Errors on your report
Although many errors on your credit report are not significant enough to affect your credit history, occasionally one can do some damage. If you are surprised at how low your score is, then double-check to make sure that no errors are on your report.;
If you find an error, have it removed from your record. Prepare for a dispute by gathering as much evidence as you can before presenting your case. And be sure to check all three of the major credit reporting bureaus, Experian, Equifax, and TransUnion. The mistake may appear on just one, two, or even all three reports.
There can also be negative information on one of the reports. As with errors, double-check all three reporting bureaus to make sure it doesn’t appear on another report besides the report you originally found it on. Credit repair is much easier when you can have a negative error corrected.
Credit card tips
- Only apply for credit when you need it. A few cards are usually okay but don’t apply every time a new card comes out with a sign-up bonus.
- Keep a calendar of each one of your payment due dates. Don’t miss one or your credit score will suffer.
- Stick to a budget. By knowing how much you spend and where every dollar goes, you won’t be surprised when something negatively affects your credit score.
You can survive life with bad credit, but things will never be as easy for you than when you have good credit. Hopefully, some of these suggestions will help save you money and make your life much easier and more rewarding.
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