You may think that bad credit can keep you from getting a loan or credit card, but it can also cause bigger issues. It can leave you without a car, home or even jobless. The reason for this is that most enterprises use the credit scores of consumers to make decisions about them.
Lenders use the credit score of borrowers to gauge their creditworthiness, and how likely they are to repay what they have borrowed. Your credit score determines if you can get a loan and what rate of interest you can qualify for.
If you have a bad credit score, you can lose a lot of money in the long run. Apart from your net worth, your credit score is probably the most crucial number in your financial life. Your credit score also has a significant impact on your net worth.
What is a poor credit score?
A poor credit score is one is below 670. Lenders consider a score between 580 and 669 fair and one between 300 and 579 as poor.
Although different scoring ranges and models for credit scores exist, a majority of lenders use FICO (Fair Isaac Corp.) scores, and they range from 300 to 850. The qualifying credit scores of different loans differ. However, to get the best rate of any lender, your credit score should be in the 700 range at least. In the FICO scoring model, 700 falls in the center of the good range. Lenders consider a credit score of 700 or higher to be good, while 800 or higher as excellent.
Credit score thresholds that many auto and housing lenders use to calculate the interest rate they can offer
Here is what many lenders use to calculate the interest rates they can offer and what you should aim for to get the best rates on various type of loans.
Lenders offer car loans at the best rates for consumers whose credit score is 720 or higher. For instance, if your credit score is 700, you can qualify for 6% for a car loan of $29,620, paid over 60 months with the monthly payment being $572. The total interest is $4,701.
However, if your credit score is 72 or higher, you can qualify for a new car loan at the rate of 4.6% with a monthly payment of $554. This can save you $18 every month and $1,078 over the loan’s life.
Cash Back Rewards Card
Almost half 49% of Americans who own a credit card have a cash-back card. This card is among the most popular kinds of rewards cards. If your credit score is 740 or higher, you can easily get a top cash-back card. If your credit score is 650 or lower, you might still qualify for a cash-back rewards card. However, your credit limit is likely to be lower and the interest rate higher. You can make a cash-back card worthwhile by paying your bills in full to avoid paying interest.
Private Student Loan
Your credit score does not matter if you are applying for a federal direct student loan as an undergraduate. However, if you need to apply for a private student loan, lenders will look at your credit history and scores.
To get the best interest rate on your private student loan, you need a credit score of 750 or higher. That’s is about 3%. You can still qualify for a private student loan if your score is as low as 650. However, the interest rate will be much higher. Lenders can charge you 8 or 9% or as high as 14%.
Unlike other kinds of loans, mortgage lenders usually pull three reports and end up with what is commonly referred to as a tri-merge credit report from Experian, Equifax and TransUnion. Basically, lenders tend to go with the borrower’s middle score of the three reports. This means you need a score of 760 or better at two of the three to get the best interest rate of 3.32%.
For instance, according to the FICO loan savings calculator, if your credit score is 759, you can qualify for an interest rate of 3.54% on a 30-year fixed loan of $216,000. You will pay $975 every month and your total interest over the loans’ life will be about $135,000.
However, if your credit score is 760 and you apply for a loan of the same amount, you would qualify for an interest rate of 3.32%. Thus, your monthly mortgage payment will be $949, which is $26 less. You would pay about $125, 500 in interest over the loan’s life. This means that a 1-point increase in your credit score can help you save about $9,500 in interest.
Before looking for homes for sale, it is advisable to check your credit score and get your credit reports from the 3 major credit agencies. If you address credit issues early on, you can raise your score before applying for a mortgage.
How to Repair Credit
If you improve your credit score, you can qualify for better terms and lower interest rates. That is true whether you need to borrow money for personal reasons or so that you can lease a facility or buy inventory.
The issue with repairing your credit history is that it is almost the same as improving your professional network. You may only think about improving your credit scores when applying for financing. It is not also possible to repair your bad credit overnight.
Therefore, you should start repairing your credit right now. Thankfully, it is easy to establish, repair and maintain excellent credit. If your credit score is poor, you can do the following things to improve it.
Review your credit reports
The three main credit reporting bureaus – Equifax, TransUnion and Experian are required to provide consumers with a copy of their credit report once each year without charging a fee. You only need to request for a copy of your credit report from the bureaus. Once you get a copy of your free report, view the information in them to see if everything is correct.
Dispute any negative mark
In the past, the only way you could dispute errors was by writing letters to the credit bureaus. Now, some services enable consumers to dispute mistakes online. Some factors weigh more heavily on your credit score than others do. Therefore, pay attention to such items first.
Some factors that affect your credit score more heavily include judgements and collection amounts. It is not unusual to have one or more collection accounts appear on a credit report. For instance, you can have a collection account from a health care provider. Your instance firm may have claimed to pay it while the health care providers may claim it was not paid.
You can dispute mistakes through each credit bureau. Remember that some errors will take longer to rectify than others, but that is fine. After initiating a dispute, you do not have to do anything else. The credit bureaus will investigate the dispute and report the resolution.
Spend as long as it takes to ensure that the credit bureaus remove derogatory remarks from your credit history because they have a significant negative impact on your overall score.
Dispute inappropriate late payment entries
Errors occur. For instance, your mortgage lender may report that you paid a certain payment late, yet you had paid it on time. A credit card provider might also not enter a payment correctly. It is possible to dispute late payments, regardless of whether they are in closed or current accounts, in a similar manner to the way you inform credit bureaus about derogatory remarks.
Your payment history can have a negative impact on your credit score. Therefore, do your best to clean up the mistakes.
Increase credit limits
Your credit card utilization also has an impact on your credit score. Ratio of credit that is available to the credit utilized makes a significant difference. In general, carrying a balance or over 50% of your available credit impacts your score negatively. Your score also suffers when you max out your credit cards.
You can improve your credit ratio by paying down your balances or buy increasing your credit limit. For instance, if you owe $2600 on a card with a limit of $5000 and you get the limit raised to $7,500, your ratio will improve instantly.
You can call the company that issued your credit card and ask it to increase your credit limit. If your payment history is decent, most credit card firms will be glad to raise your limit. After all, credit card firms make more money by lending more.
After the credit card firm increase your limit, avoid using the additional available credit, so that you do not fall back to the same available credit ratio boat or end up deeper in debt.
Pay all your bills on time
The way you pay your bills affects your credit score significantly. Late payments remain on your credit report for 7 years. However, their impact on your credit score reduces over time. One great way to make sure you are never late is setting up autopay for recurring bills like car payments and student loans. Your bills will be deducted directly from your bank account on the due date. Therefore, you do not have to log in to a payment portal or send checks. Make sure there is enough money in your checking account to cover the payments so you will not be subject to overdraft fees.
You also need to inform your creditor about your ability to repay the borrowed funds. For instance, federal student loans have alternative payment plans which can reduce the amount you owe every month. You can only know about such plans by contacting your student loan servicer and inquiring about your options. Credit card firms may also reduce your interest rate or payment for a particular period if you are facing financial challenges. If you suspect that you will miss a payment, talk to your creditor before it occurs to explore your options.
Avoid closing older credit lines once your pay them off
Even though it may sound like an excellent idea to close unused accounts, that is not the case. Doing so could raise your credit utilization ratio and this can lower your credit score.
Avoid taking out large loans or opening new lines of credit
You are better off when you have less debt. In the opinion of FICO, it is not wise to open new credit accounts to raise you credit utilization ratio since each credit request can lower your score slightly.
Pay off high interest credit accounts first
The age of credit has an effect on your credit report. Interest affects your finances. If you have money like $100 you can put toward reducing credit card balances, concentrate on paying off high interest accounts.
Pay off the newest credit card balances first. This way, you can raise the average length of credit and this will help your score. Besides, you will not pay relatively high interest.
How to maintain an excellent credit score
After completing the hard work of fixing your bad credit score, the next step is to keep up the momentum. That means you should diligently maintain low balances on credit cards, pay all bills on time and seek out new credit only when necessary.
The length of a person’s credit history accounts for 15% of a FICO score. Therefore, it is advisable to keep old accounts open so you can keep a long average credit history. You can achieve this by placing a small charge on your oldest credit card occasionally, and paying it off soon.
The range of credit types with your name, also known as the credit mix makes up 10% of FICO scores. It is not necessary to take out a new loan just to diversify your credit mix. However, managing a credit card dependably is an effective way to keep your credit score high. Therefore, if you have not applied for a credit card in the past, you can apply for a secured credit card that requires a deposit. The deposit will become your credit limit. You can make small charges and pay them off every month to improve your score and you could then qualify for a conventional, unsecured card in the future.
If you take all the steps mentioned above and you still find that you are struggling, you can seek help from an approved credit counseling agency. The agency can assist you to create a plan to manage your finances better and reduce your debt.
Another option if you are struggling with high credit card debt is debt consolidation. This plan can enable you to roll several high interest debts into one payment, usually at a reduced interest rate and provide you with a single payment to track.
Be wary of organizations that promise to fix your credit with little effort or time, or claim to charge a fee to fix your credit. It takes time and effort to improve your credit score.
Having a bad credit score can limit the loans you can qualify for and diminish the chances of getting financing at good interest rates. However, such a score should not weigh you down. You can take certain concrete actions now and, in the future, to keep your credit score high.
Knowing the status of your credit history and making sure you do not avoid the reality of you credit status are essential ongoing strategies in the desire to enhance you credit. Get a free credit report regularly and feel empowered knowing you can improve your financial well-being.