What is a credit score and what is it used for?
Whether you’re looking to open a new credit card account, buy a house with a mortgage, or even get car insurance, you need good credit. This means that your credit score will likely come into play. If your score is too low and your credit is weak, you may find that a lender will offer you a higher interest rate or other unfavorable terms – or, in some cases, you might even be denied the products and services you most want. .
If you don’t already know your credit score, you should consider using an online tool to help you. There are easy ways to find your score in minutes.
Although it can be stressful, having bad credit is not the end of the world. Let’s take a look at what it means to have a bad credit rating, how it can affect you, and ways you can work to rebuild your credit rating.
What is a credit score?
Your credit score is a three-digit number that measures your creditworthiness, or your likelihood of responsibly managing your financial accounts, including your credit card debt. This number varies between 300 and 900, depending on the credit bureau calculating it. The higher your score, the more creditworthy you are considered.
If your credit score is rock bottom, don’t panic: there are steps you can take to improve that number (which we’ll get to later). It might not be a bad idea, however, to seek expert advice and tips on how to improve the way you manage your personal finances.
There are three credit reporting agencies in the United States, which are responsible for tracking and maintaining credit-based activity for American adults. These bureaus – TransUnion, Equifax and Experian – receive information from existing creditors and provide this information to potential creditors who can “pull your credit.” These creditors may use a number of different models to calculate your score, including FICO (the the most popular), VantageScore and others. So you can have more than one credit score.
Again, it’s worth checking your score to make sure you have the latest number. Your credit score can change over time, so be sure to use the tools at your disposal to have the most up-to-date information.
Each time you open a consumer account, such as a loan or a credit card, the creditor will report the new account to at least one of the credit bureaus. Each month, they’ll also report your most recent account activity: whether the account is still open, how much you currently owe, what your credit limit is, whether you made your last payment on time, and any personal information related to the account.
These reports are added to your credit history, where they will remain for seven years before dropping.
What causes a bad credit rating?
Although each credit scoring model has its own rating ranges, anything below 580 to 600 is generally considered a bad rating. If you have a bad credit score, it can lead to declined loan applications, limited credit card options, and even higher car insurance rates.
Bad credit is usually the result of one or more of the following:
Not having enough (or a diverse mix of) different accounts
Payment history: late payments can play against you in particular
Unpaid accounts or those that have been collected or debited
Credit utilization: How much of your credit capacity is currently available?
Too many requests in a short time
Too many new accounts recently opened
History of bankruptcy and/or judgments
You can also get a bad credit score if your credit history is limited or non-existent. If you’ve never opened (or tried to open) a credit account of any kind – a credit card, a loan, a charge card such as American Express, or even a medical bill on collection, it is likely that your credit report will be quite sparse if not empty. If the credit bureaus don’t have any information about your creditworthiness, it’s difficult for a scoring model to calculate a score for you.
How to improve a bad credit score
If you have bad credit, improving that number to three digits is a smart goal. A higher credit score can unlock lower interest rates, better loan terms, new credit card options, available lines of credit, and lower rates on things like insurance. But wanting to improve your credit score and doing it are two very different things.
While a single late payment can drop your score by dozens of points, rebuilding that score can take a lot more time and effort. In general, you will increase your chances of having a good credit rating by:
File disputes to correct errors you may find on your credit report
Make scheduled payments on time each month
Keep balances on revolving lines of credit as low as possible (ideally try to have less than 30-35% utilization)
Do not ask for credit unless you need it
Consider a secured credit card to prove your creditworthiness
Limit the number of new accounts you open in a short time
Pay off your debts as quickly and efficiently as possible
If your credit history is limited, you can sometimes get your rent payments and even your utility bill payment history added to your credit report. As long as you made these payments on time, it can help you quickly increase your score and get a good credit score.
At the end of the line
Your credit score can sometimes seem like three arbitrary numbers, but they have the power to control many factors in your financial life. Building and maintaining a healthy credit rating can not only make your life easier, it can also save you money in the long run.
Having a bad credit rating is worrisome, but can absolutely be fixed with a little time and dedication.