The realization of bad credit always comes at the worst time. When applying for a new residence or a loan, or a credit card due to an emergency. It may also come up when you are trying to buy a car or a home when suddenly you are denied financing.
All it takes is a few financial missteps in your youth, and you will be unable to secure financing and loans. It can happen to anybody. It is difficult to shake off bad credit because it typically stays with a person for seven years.
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Does Good Credit Really Matter?
A credit score is a number from 300 to 850 that boils down to how likely you are to repay debt. The higher the number, the better your score. This information is considered the most credible because it is based on your repayment and borrowing history. For that reason, anyone considering lending to you will be interested to see your score.
But it is not just credit card companies that will look at your credit score. Your credit score will come up any time you want to:
- Lease a Car
- Get a mortgage
- Rent a home
- Apply for Insurance
- Get a Job
- Set up utilities
- Receive Government Assistance
- Sign up with a new cell phone company
- Get a bank account
- Get a student loan
So unfortunately for those who are struggling with poor past decision-making, poor credit can and does matter.
Good credit scores can mean receiving better interest rates and qualifying for more financing, loans, and credit cards to give you flexibility in your borrowing. So not only are you more likely to qualify, but you are also more likely to get better repayment rates with good credit.
What Made Your Credit Go Up or Down
Before we go into detail about what will help raise a poor credit rating, it is helpful to elucidate some of the factors that contribute to lowering a credit score.
Most obviously, late or missing payments on any bills are going to make your credit score fall. Repayment falls into time allotments of 30, 60, and 90 days. Think of these as the three strikes that most companies offer. Creditors will be notified at 30 days, and going past this; your credit will drop at higher intervals.
Your credit will also be lower when you have just applied for new financing, loans, or credit. Whenever you apply for one of these, the lender makes a hard inquiry into your credit. This type of inquiry affects your credit and is different from a soft inquiry that looks at your score and does not affect your credit.
Closing a loan or decreasing a credit card limit will also affect your credit because it decreases your credit utilization. The credit utilization ratio is an essential factor in determining your credit score, as it is the total of your credit usage as related to the credit available to you. For the best score, it is ideal to keep this ratio below 30%.
When it comes to building back your credit score, here are the solutions.
Organize Bill Payments and Never Miss One
The most crucial factor in decreasing a credit score is neglectful bill payment history. Whether it is a matter of organization or affordability, it is essential to get to the bottom of why you have not been able to keep up with your bills.
If you live above your means, you need to consider why this might be the case seriously. Sometimes overspending is the result of disorganized finances, but sometimes it is the result of something deeper.
Consolidate Debt
Debt consolidation is a tried and true method of lowering interest payments while paying down debt. If you can secure a loan at a lower interest rate than that of the credit card or debt you are repaying (which is not difficult to do), it will save you tons of money in the long run.
The loans that are available today are more creative than ever before. If you own your own home, you can take out a home equity line of credit. If you own your car, you can use it as collateral to secure a loan. These are types of secured loans that can be easier to get since the lender has collateral.
Limit Hard Inquiries into your Credit
Consider the loan you open to consolidating your debt, the last line of credit you open while trying to rebuild your credit. This is because, as mentioned, every time you apply for a new credit card, or line of credit, the lender will conduct a hard inquiry into your credit, which can lower your score for up to two years.
Pay Your Credit Cards in Full
There is a myth circulating that good credit can be built by simply paying the minimum on your credit card every month. But this is one incorrect myth. There is a little-known leveraging technique for building good credit when it comes to your credit card, though.
The one way you can build your credit with your credit card is by paying the balance in full every month. By paying the full balance, it improves your total credit utilization percentage.
It is worth remembering that credit scores are not all that lenders consider. Lenders will also look at your income, the amount of money in your bank accounts, and your employment history. It is also possible to have a loan co-signer if needed.
So, bad credit does not have to mean your application will be denied. However, it is always advisable to get your credit rating up without delay because it takes time to work, and you never know when you are going to need it.
