Understanding the Impacts of Bad Credit
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Credit is far more important to our lives than some of us realize. If you know that your credit score is in bad shape, there is a solution. We are a credit repair company and have been helping those people with bad credit reconstruct it into something positive.
There are far too many people that do not truly understand what a bad credit score is and what it can do to their ability to get the important things in life. We all know that having a bad credit score is, well, bad, but what impact does it have on our lives?
Understanding the Negative Impacts of Bad Credit
Having bad credit is never a good thing and it is not something to be proud of. Having a bad credit score does not mean you are a bad person, it just means that you have made some financial decisions in your life that weren’t the smartest.
Still, having bad credit can present serious roadblocks throughout your life. Perhaps the biggest (as well as the most common): rejections for major lines of credit and loans. This can include things such as mortgages, car loans, student loans (which come in both private and federal form), personal loans, and credit cards.
Those entail most of the major occurrences in our lives. Not being able to procure the money needed for a car or home can have a major impact on day-to-day living and credit cards are great to have for emergencies should they arise.
Having bad credit can even reach to finding a job. There are some employers that will want to see a limited version of your credit report while running a background check. They won’t be able to see your score, but will see a limited version of your credit history.
Even with that small glimpse, it could be enough to keep someone from gaining employment. So to say that your credit score is important would be putting it in the mildest of terms. Your credit score has an impact on nearly every corner of your life.
Lastly, it can have an impact on insurance premiums when it comes to your auto insurance. This depends on what state you live in, but there are some insurance companies that will make use of your credit report to determine the potential risk that you carry as a customer.
In the states of Massachusetts, Hawaii, and California, your credit history actually can’t be a factor when it comes to insurance rates. So, if you have bad credit, you might get a little lucky when it comes to your insurance premiums, but the rest of your life will likely be difficult to manage with a bad credit score.
Can Bad Credit Impact Your Ability to Rent?
Short answer: absolutely. To expand on it a bit further, when you go to rent an apartment or home, most landlords will run a credit check. They do this to evaluate your payment history to determine if you will pay on time.
If you have a bad credit score – one that is littered with late payments – this is likely to get you a rejection from those landlords. Having a bad credit score can severely limit the types of homes that you can qualify for and will likely mean having to live in a bad neighborhood.
But that’s not all. Even if you qualify for a home or apartment, the landlord may require that you put a larger security deposit down. So, for instance, a landlord may only ask for the first month’s rent as a deposit in normal circumstances. For bad credit scores, they may ask for the first month, last month, and a security deposit on top of that. That is a whole lot of money to put down for a place to live.
Even the utility companies could wind up charging you a security deposit to use their services. Gas, electric, and water could all require a deposit before allowing access to service in your new home. That is how far your credit score can reach.
Understanding Credit Scores
Before you can begin to wonder how to fix a bad credit score, you need to understand all of the different tiers of credit. There are five: exceptional, very good, good, fair, and poor. This may seem simple, but there are also several bureaus.
That’s right, there are three different credit bureaus as well as FICO. The three credit bureaus in the United States are Equifax, Experian, and TransUnion. Though they share many similarities, there are some minor differences in the way that they grade your credit that can result in different scores across all three (and FICO).
Credit scores range from 300 to 850 no matter the bureau that you use. For simplicity sake, we will use FICO to demonstrate the ranges of credit that there are.
At the tippy top is your exceptional score. This is the range of 800 to 850 and it doesn’t get better than this. When you have an exceptional credit rating, you can get approved for absolutely anything and will get the very best rates as well. When you have the best interest rates, you save more money over time.
Getting an exceptional score isn’t easy, though. No, you have to have a perfect credit history to achieve this. That means no late payments, no negative accounts, no major transgressions; your credit history has to be spotless.
The next level down is a very good credit rating. This is your range from 740 to 799 and is a great place to be as well. You will qualify for anything and will likely get some of the best rates out there depending on the lender in question.
Like exceptional, this means having a great credit history. There can be minimal negativity in your credit report and you have to meet all the criteria to hit this range of credit score. If you are in the very good range, you are in a good place.
After that is the good credit tier. This is a range of scores from 670 to 739 and is a solid place to be. A good score is just that: it is good, but it is not perfect. The issues here could be in credit utilization or debt-to-income. Still, having a “good” credit score is likely enough to get you a pretty good rate on something such as a home, car, or on your credit cards.
As we go further down, we reach the second tier from the bottom: fair. A fair score is not quite bad, but it isn’t quite good. A fair score ranges from 580 to 669 and will often get your foot in the door when it comes to mortgages, loans, and credit cards.
With a fair credit score, you won’t qualify for the best rates and it will ultimately cost you a little more money down the road. Still, you will be able to qualify for most things which is most of the battle at times.
On the very bottom of the ladder is a poor credit rating. This is from 300 to 579; there is no going below that. Being in the poor credit category is not a good place to be and creates an uphill battle when dealing with lenders.
If you are closer to the higher end of poor, you will likely qualify for a lot of things but will pay the highest rates that there are. Taking on a credit card or loan with a poor credit rating means that you will have to pay serious money in interest.
The Factors Behind Credit
While a credit score cannot change overnight, they are also not static. This means that they change when there is information in your credit report that changes. It also means that you can take control of your overall financial health and make the necessary moves that will have a positive impact on your credit score going forward.
There are major factors that impact your overall score. Your payment history accounts for around 35% of your total score. This tells the bureaus if you are paying your bills on time or if you have late or missed payments both currently and in the past.
Your credit report indicates not only how much credit you have available to you, but also how much of it you currently have in use. This is known as your credit utilization rate and it accounts for 30% of your credit score. The credit bureaus generally want you to keep your credit utilization down to around 30% or so of your total credit line.
So, let’s say you have four credit cards open with a $10,000 limit between them. That would mean that your total balance used should be less than $3,000. That can mean that you have one card with $2,000, another with $200, another with $300, and so on. So long as the total is less than 30%, you are in good shape.
One factor that takes time and can’t be impacted instantly is how long you’ve been using credit. Your credit history is how long you have had open lines of credit and has a cumulative score. So, for instance, you could have two credit cards that you have had for two years and a car loan you’ve had for four. Your credit report would factor those into your total credit history.
Your credit report also looks at the types of credit that you have. This is the difference between loans (car, mortgage, or other), credit cards, and so on. It also takes into account what is known as hard inquiries. These are accounts that you’ve applied for (loans in particular) or applications that you have made for lines of credit.
Getting on the Right Track
Thankfully, there are more than a few ways to get your credit back on track. It doesn’t get to be in a bad place overnight and it won’t get better overnight, either. When you understand the biggest factors in credit, it can give you the tools that you need to move forward.
The biggest factor in your credit history is your payment history. If you frequently pay your credit cards or loans late, this will have a major impact because it accounts for 35% of your FICO score. Pay your bills on time and you have a major leg of the credit game down.
Almost equally as much in value is your credit utilization, which takes up 30% of your score. Your credit utilization is how much of your current credit limit that you are using. Credit bureaus want you to stay at 30% utilization or lower.
So, if you have $10,000 in available credit, you have to keep your limit at $3,000 or less to stay in good standing on your credit report. Higher than that can have a varying impact on your score; thankfully, it is also the quickest fix if you have the money to pay down credit cards or consolidate them.
There are other factors that take time, too. Your credit age is something that takes time; if you have a young credit history, it will take time for that to build up but it accounts for just 10% of your overall score, so it won’t totally sink your credit score.
Whatever the issues that are currently plaguing your credit report, there are remedies to be had. If you have a bad credit score, it isn’t a good thing but it isn’t something that has to drag you down for the rest of your life.
Take a good look at your credit report and understand where the issues are. That is the first step toward understanding what you need to do to better your overall score and open up more avenues in your life.
Don’t let a bad credit score sink you. Do what you need to do to make your life easier by having the best credit that you can have.
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