Bad credit can affect your ability to secure loans. It affects our creditworthiness, how likely you are to repay debts. Lenders use credit scores and history to make loan determinations. People with bad credit have low credit scores.
What is a Credit Score?
A credit score is a 3- digit number between 300-850. A credit score is used by lenders to determine whether a person qualifies for a particular credit card, loan, or other service. Property managers and sometimes employers use this score to evaluate their own risk in entering agreements with you for property or evaluating you for employment. They are specifically evaluating the likelihood that a person will make payments on time. Generally the higher the score the less risk a person represents. Scores 720 and above are usually considered a safe risk and receive loans with lower interest rates.
How is a Credit Score Determined?
A credit score is a mathematical model used to evaluate information on a credit file. The date is grouped together in five categories as follows:
35% Payment History
Having a good payment history reflects that you make payments on time and do not miss payments on credit accounts. This is one of the most important items a lender will look for.
The presence of adverse public records such as bankruptcy, judgments, liens, collections, or delinquencies (past due items), as well as the severity of the delinquency, the amounts past due, the time since the delinquencies or negative items were reported, as well as the number of adverse items on the report are all considered.
30% Amounts Owed:
This is a measurement of the amount you owe in proportion to the total credit limits you have available. Someone who is closer to their maximum credit line is deemed a higher risk for late payments than someone showing larger available credit limits.
15% Length of Credit History
The credit-scoring model considers your oldest account and the average age of all your accounts. It is a good reflection on your credit report to have an account with a long history.
10% New Credit
The number of recently opened accounts and the type of account can affect your score. Also multiple credit inquiries can represent a greater risk.
The type of credit you have in use is considered, your mix of credit cards, mortgage loans, installment loans and consumer finance accounts affect your credit score.
A credit score takes into consideration all of these categories to determine your score. Remember your credit score is a consideration of both the positive and any negative information in your credit report.
Getting a Loan with Bad Credit
Many experts recommend going to your local credit union if you have bad credit and are in need of a loan. Credit Unions are typically smaller than banks and are member owned. They may be more likely to look at your entire overall situation when making loan decisions.
Many people with low credit scores choose to borrow money from their friends and family. Your friends and family know your entire situation not just your credit score and are more willing to lend money to the people they are close to.
Improving Your Credit
If you have bad credit now, it does not mean you always have to have bad credit. You are not destined to always need a bad credit loan. You can start improving your credit today. Here are a few tips to improve your credit now.
Pay your bills on time. One late payment can lower your credit score, keep up with your payments and make sure they are on time.
Keep your credit card balances low. If you have high credit card debt put a plan in place today to pay your balances down. Only charge what you can pay off at the end of each month.
Check your credit every year. Make sure everything on your report is true, accurate and correct.
Bad credit can be fixed and a great financial future is possible. Start building your future today.
Take control of your credit today and let your credit work for you.