Easy to Get There...Hard to Get Out
You probably already know if you have really bad or really good credit. But there is a big middle area within credit where your score is too low to get the best offers. If you are trying to get a new credit card, get a loan at the car dealership, get a mortgage or borrow money for some other purpose, your credit score makes that decision.
With a low score, few banks loan to you and those that do will offer you their highest interest rates. A bad credit score can also increase insurance rates or cause insurer companies to reject you altogether. Negative items in your credit report can even prevent you from getting certain jobs. Even a mediocre score will increase rates compared to those offered to people with excellent credit.
A bad credit score is a FICO score in the range of 300 - 620. Some score charts subdivide that range, and call “bad credit” a score of 300 - 550 and “subprime credit” a score of 550 - 620. Needless to say, you’ll have trouble getting a good interest rate or getting a loan at all with a credit score of 620 or lower. On the end an excellent credit score falls in the 740 - 850 range.
Credit Behaviors That Lower Your Score
Borrowers with bad credit usually have one of more of the following negative items on their credit reports:
– delinquent payments on accounts
– charge-offs from collection agencies
– collections from collection agencies
– foreclosure on a house
– short sale of real estate owned
– deed in lieu of foreclosure
FICO credit scores are based on five categories of borrowing behavior, some of which may affect your score more than others. Payment history counts for 35% of your score, so missing your payment due dates does seriously hurt your score. Being 31 days late is not as bad as being 120 days late, and being late is not as bad as not paying for so long that your creditor sends your account to collections, charges off your debt or agrees to settle your debt for less than you owe.
How much you owe compared to how much credit you have available is another major factor, which acccounts for 30% of your score. If you have three credit cards, each with a $5,000 credit limit, and you’ve maxed them all out. Your credit utilization ratio is 100%. The scoring formula is more favorable on borrowers whose ratio is 20% or lower.
The least important is the length of your credit history, which counts for 15% of your score. You don’t have much control over this. Either your credit history stretches back several years or it doesn’t. The number of new credit accounts you have counts for 10% of your score, so when you apply for new loans to move your debt around might hurt your score. On the other hand, if moving your debt around means getting a lower interest rate that helps you get out of debt easier then new credit could ultimately help your score.
Types of credit used counts for 10% of your score. If you have an auto loan, a mortgage and a credit card , which are three different types of credit, can mean a better score than if you just have credit cards. Applying for different types of loans to try to improve your score will have little impact and will get you further into debt, which is not what you want when you have less than good credit. Try paying down your balances and making your payments on time.
What Won’t Directly Hurt Your Score
The following things have no direct impact on your credit score:
– Your income. It doesn’t matter whether you make $11,000 or $110,000 per year, as long as you’re making your payments on time. Having a low income doesn’t mean having bad credit.
– Your participation in a credit counseling program. Signing up for help managing your bills neither hurts nor helps your score. It’s the specific steps you take under that program that will change your rate
– Your race. Even if someone could easily guess your race based on your name, FICO does not factor race into your credit score.
– Your marital status. Your credit report doesn’t state whether you’re married or divorced, nor does it factor this information into your score.
–The interest rate on any of your loans or credit cards. Whether you’re paying the default rate of 29.99% or a promotional introductory rate of 0%, the scoring formula doesn’t care.
Is it Bad to Not Have Any Credit
While not technically bad because it means you probably have no debt, having no credit history and no credit score can make it harder to rent an apartment, open a credit card account or get a loan. Sometimes, you can get around your lack of a score by using alternative methods to prove your financial responsibility. If you want to get a mortgage, you can submit a history of timely rent and utility payments with your mortgage application.
Implications of a Bad Credit Score
If you’re able to get approved for new credit at all, having a bad credit score means you’ll pay significantly higher interest rates than someone with an excellent score. The consumer credit counseling agency Springboard reported that in January 2014, "a consumer with a credit score of 300 to 550 could expect to pay 9.5% for a mortgage, 18.9% for an auto loan, and 28.9% for a credit card". Borrowers in the subprime category of 550 to 620 wasn't much better, except in credit card rates, where they might pay 19.8%. However, a consumer with an excellent credit score of 740 to 850 could expect to pay 3.9% for a mortgage, 5.1% for an auto loan and 7.99% for a credit card.
The higher rates you’ll pay when you have bad credit mean higher monthly payments and a lot of money spent on interest in the long run. You can expect to pay higher premiums for auto and homeowners insurance, too. It’s hard to improve your finances under these conditions.
How to Improve a Bad Credit Score
There are some extreme ways to try to raise your credit score, but not everyone can use them. Here are some simple steps you can take that can improve your score.
Make at least the minimum payment on time, every time, on every account. You may not have the cash to pay off your balances or, but if you can at least make the minimum payment by the deadline each and every month, it will help your score.
Try to fix significant credit report errors. If there are negative items on any of your three major credit reports, follow the credit bureau’s steps to try to get those items removed. This process is long, frustrating and even futile.
Talk to your creditors. If you’re having trouble repaying your debts, see if you can work out an arrangement with any of your credit card companies or lenders. Make sure you get any agreement in writing. Be aware that some arrangements can hurt your score. Getting your credit card payment due date changed to five days after you get your paycheck, will not hurt your score, but getting your creditor to reduce your loan balance will.
Track your credit score to see whether your efforts are making a difference. To stay on top of changes in your credit score, consider using one of these top websites for checking your credit scores. You don’t need to sign up for a paid credit monitoring service or pay for your score.
It is not really about improving your number, but about correcting the problems that got you into this difficult financial situation. It’s about taking action to give yourself more options and more peace of mind when it comes to your personal finances and your life. In the long run, it’s not having a 740 credit score, but being out of debt and having money in the bank that will allow you freedom.
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Lang Premier Properties are Birmingham Realtors specializing in Oakland County Real Estate. Stephanie is an agent with Lang Premier Properties. See what past clients have to say about Stephanie Lang. Lang Premier Properties looks out for your best interests when you purchase a new custom luxury home. We always recommend working with an experienced luxury real estate agent when buying a new luxury estate.