Missing a bill here and there won’t cause any long-term problems. Right?
Unfortunately, that’s not the case. Mismanaging finances has gotten many Americans in trouble. In fact, 30% of Americans have bad or no credit.
But what exactly does that mean? If you’ve never looked into what bad credit means, it can be confusing when you first get started.
This post will tell you what you need to know. Keep reading to learn what bad credit is and how you can work on credit score recovery.
Before you learn what bad credit is, it’s important to understand credit scores.
You can think of a credit score as a grade. It tells lenders how trustworthy you are with money.
Your credit score can range from 300 to 850. If you have a score below 580, then you are considered risky and have a bad rating.
On the other hand, if you have a score of over 680, then you have a good score. When your score is above 680, companies are much more likely to give you credit or loans.
There are three companies in the United States that give you a credit score. They are Equifax, Experian, and TransUnion.
Lenders report your history to these companies, and they assign a score to you.
The first thing to keep in mind here is terrible credit is not the same thing as no credit. If you’ve never had credit before, then you won’t have a credit score.
When you have bad credit, it means you have a history of not keeping up with your past credit agreements and bill payments. The following are the ways you can get a ding on your credit score:
- Late bill payments
- Defaulting on loans
- Having bills sent to collection agencies
- Repossessed vehicles
- Home foreclosures
Once you have bad credit, things get harder. Lenders are less likely to give you credit or loans. You’ll have a much harder time getting the money you need.
If you do manage to get approved for credit, the terms aren’t going to be good. You can expect large security deposits or high-interest accounts.
Luckily, you aren’t out of luck if you have bad credit. There are several ways that you can get your credit score back up.
It isn’t an overnight process, so you’ll have to stick to a long-term plan. Use the tips below to get started.
Before you start to repair your credit, it pays to know what on your credit report is dragging you down. You can sign up for a free credit report at CreditKarma to see what issues you have.
Your report will show you all your credit accounts and how they impact your score. When looking through your report, the first step is to find any errors.
In a perfect world, everything would work correctly. But people make typos, make duplicate charges, and make incorrect reports. Fixing these problems are easy fixes that can help improve your score.
Do you have any overdue payments? If so, prioritize getting these paid off. A bill isn’t considered late until it’s 30 days overdue, so you have until then to get your bills paid.
Your credit is impacted once you go past the 30-day mark. The longer you leave a payment overdue, the worse it is for your credit score.
Sounds counter-productive, right? But getting more credit is a great way to help your credit score.
It does this by increasing your credit utilization ratio. Your credit utilization ratio is the total percentage of your credit that you are using. If you have $10,000 in credit and are using $2,000 of it, then your ratio is 20%.
The lower your percentage is, the better it is for your credit. You want to keep your utilization below 30%.
If you have problems opening a new account, you may need to find credit cards for bad credit. These are usually secured credit cards.
You’ll have a security deposit and small limit, but you’ll have a credit card you can build a solid history with.
If you have a large balance on a high-interest credit card, you’re probably paying more interest than you’re paying on your balance. If you keep doing things the same way, you’ll be paying off your credit for a long time.
Luckily, you have a balance transfer available to you. Find a 0% APR introductory credit card and transfer your balance to that card. Now when you pay on your credit card, you’re only going to pay on the principal.
You’ll get your balance paid off much faster.
If you’re dealing with a lot of debt, debt consolidation is a great option. Instead of paying on multiple accounts, you use a loan to pay off the rest of your debt.
Your loan will likely have lower interest and lower monthly payments. This means you’ll pay less money on interest long-term and can use the money you save to pay your principal off.
It might be tempting to close your old accounts after you get them paid off. After all, you don’t want to return to bad habits.
But closing your accounts can do more harm than good. Your credit history is affected by the average age of all your credit accounts. When you close your accounts, you’re reducing your average age.
This can cause your credit score to go down. As long as you aren’t misusing your money, there’s no harm in leaving accounts open.
Don’t feel bad if you have bad credit. It happens to a lot of people, and it’s something that you can get past.
It will take work and time, but when you use the credit score recovery tips above, you can get past your lousy credit.
If you want a place to start, then getting your finances in order is the first step. Keep reading our blog to learn our latest money savings tips.