One of the worst financial situations that you can find yourself in is to have a bad credit score. It is something the entire world would agree to. Why? Well, with a bad credit score, your doors to achieving your life goals close.
Typically, everyone’s life goals include purchasing a home, owning a car, or establishing a business. The majority of the world’s population achieve their life goals through loans. There are very few people in the world who are wealthy enough to make these huge purchases with their savings. Unfortunately, the rest of the world has to rely on personal loans, mortgage, and business loans.
A traditional source of loans is full-fledged financial institutions such as banks, and these impose strict requirements for borrowers. These organizations base their lending decisions on the credit score of a borrower, which is why it is very challenging to get approval for a traditional loan.
Before we get into the details, we need to understand exactly what credit score is and the difference between good credit or bad credit. One of the most prominent reasons why you are not getting approval of mortgage or personal loan is because you have bad credit and you do not even know about it, but what is a credit score?
A credit score is a statistical number that a lender will look at when approving your loan application. The number provides an insight into a borrower’s creditworthiness. It helps lenders evaluate if a borrower is capable of repaying the loan or not. A credit score lies between 300 to 850. A high credit score is an indication that a person pays the bills and repays the loans on time without defaulting on any of the monthly payments.
BAD CREDIT AND ITS EFFECTS
The payment history makes 35% of the credit score, the total debt takes up 30% of the score, while the length of credit history, credit types and new credit make up the remaining 15% and 20%, respectively. These are the five elements that make up a credit score. If there are flaws in any of these elements, it will negatively affect your credit score.
A score between 800 t0 850 is an excellent score, between 740 to 799 it is a very good score, a good score lies between 670 to 739, while fair and poor credit score lie between 589 to 669 and 300 to 579, respectively.
A poor or bad credit score will have adverse effects on your borrowing capability, including high-interest rates. Moreover, a bad credit score leads to rejection of loan applications, difficulty in getting approval for an apartment, and even make it mandatory for you to pay security deposits on utilities.
IMPROVING BAD CREDIT
If you are thinking about whether you can improve your credit score, the answer to this is yes. You can improve your credit score, it is a long process, but it is possible. There are ways you can get loan approvals with bad credit, including merchant cash advance for bad credit holders and hard-money lenders, but you should improve your credit score.
Start with Checking Credit Reports
You pay your bills on time, and you are not a defaulter on your debt payments, but still suffering from bad credit? There are chances that there are errors in the credit reports. So, what do you do if you are in this situation? Well, you start by checking your credit reports. Request for your credit report from all major credit reporting agencies. Carefully go through every detail in the report and look for errors. An error in a credit report is not a rare case, and on carefully going through it, you might find some flaws in it.
Many people who doubt the credibility of their credit reports are skeptical to go through it as they think it might negatively impact their credit score. You need to understand that when you go through your report, it will not affect your credit score.
New Credit Card Accounts
Are you one of those people who have sworn off credit cards that it worsens your credit score situation? You need to understand that a new credit card account will not negatively affect your credit score; instead, it can help you build your credit score. Without a credit card, rebuilding your credit score is close to impossible.
You need to take up a new credit card and use it to improve your payment history. It will help you get back your finances back on track. Yes, it is difficult to get a credit with a poor credit score, but there are several options available that will help you get a credit card.
Remember that applying for a credit score at multiple places can also serve as a deterrent for your credit score. Try to choose an option that best suits your situation and apply it to only one place. However, you should research the option you choose. Thorough research will ensure that you do not fall prey to subprime or prepaid credit cards. These two types of cards do not improve your credit score, rather they significantly lower it.
Pay Your Bills on Time
A major contributor to your credit score is the way you pay your bills. The credit score depends greatly on how responsible you are with your bill payments. It makes 35% of your credit score. If you are constantly defaulting on your bills and repayment of debts, you are most likely to suffer from a bad credit score, and it can stay on a credit report for up to seven years.
Even if you pay your bills only a few days after the due date, it will appear on your credit report. You can set reminders before due dates or set automatic online payments. It is not that a bad score will always stay a bad score. When you begin to improve your payment trends, things will begin to get better for you.
Building Better Credit Habits
Your bad credit habits are the reason why you are in this situation in the first place. Things will not get easy for you until you kill the source, which is bad credit habits. To improve your credit report, you need to address the credit habits that are negatively affecting your credit score.
A practice that many people adopt is to charge things they cannot afford and keep paying the minimum amount on their credit card bill. Some people keep paying the minimum amount and avoid paying the credit card bill in full. It might satisfy one temporarily, but it can open the door to trouble in the future. The right approach is always to do not play on the edge. Moreover, if you can pay the credit card bill in full, you must do it.
A poor or bad credit will expose your financial troubles in the future. Your credit score will determine your financial situation and allow you to fulfill your goals in life. Incorporate these strategies into your life and see your credit score improve. Always remember that the process is long will take time; therefore, you need to observe patience throughout.
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