Whether opening a new credit card, getting a mortgage, or getting auto insurance, you need good credit.
Your credit rating helps financial institutions get a realistic idea of your overall creditworthiness. If your score is too low and you have bad credit, you may find that a lender offers you a higher interest rate or other unfavorable terms. In some cases, you might even be denied the products and services you requested.
If you don’t already know your credit score, you should consider using an online tool to help you. Get your free credit report now!
What is a credit score?
Your credit score is a three-digit number that measures your creditworthiness, or how likely you are to responsibly manage your financial accounts, including your credit card debt. This number ranges from 300 to 900, depending on which credit agency calculates it. The higher your score, the more creditworthy you are. It can unlock lower interest rates, better credit terms, new credit card options, available lines of credit, and more.
If your credit score is on the low end, don’t panic: there are steps you can take to improve that number. However, it’s not a bad idea to seek expert advice on how to better manage your personal finances. You can now start the credit repair process.
There are three credit reporting agencies in the United States that are responsible for tracking and maintaining credit-based activities for American adults. These bureaus — TransUnion, Equifax, and Experian — receive information from existing creditors and pass that information to potential creditors who may “collect your loan.” These creditors can use any number of different models to calculate your score, including FICO, VantageScore, and others. So you can actually have more than one credit score.
In order to determine exactly where you stand, it is important to get both your credit score and your credit report. Get a free credit report in minutes with Experian.
A credit report provides a detailed look at your credit history, including outstanding loan balances, late payments, and the age of accounts (the older your accounts are, the more reliable you can appear as a borrower to lenders). Credit reports can also contain outdated and inaccurate information, which can negatively impact your score. So it’s worth checking them closely to make sure they’re complete, accurate, and up-to-date. These reports are added to your credit history, where they remain for seven years before declining.
Again, it’s worth double-checking your score to make sure you have the latest number. Your credit score can change over time, so make sure you use the tools available to you to have the most up-to-date information.
Whenever you open a consumer-based account, e.g. For example, a loan or credit card, the lender reports the new account to at least one of the credit bureaus. Each month they will also report your 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 associated with the account.
What Causes Bad Credit?
While each credit rating model has its own range of ratings, anything below 580 to 600 is generally considered a bad rating. Having bad credit can result in rejected 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 enough (or a varied mix) of different accounts Payment history (late payments in particular can work against you) 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 period of time too many new accounts opened recently with a history of bankruptcies and/or judgments
You can also earn bad credit if your credit history is limited or nonexistent. If you’ve never opened (or attempted to open) a credit account of any kind — a credit card, loan, charge card like American Express, or even a medical bill went into collection, chances are your credit report will be pretty sparse, if not empty. If the credit agencies have no information about your creditworthiness, it is difficult for a scoring model to calculate a score for you.
How to improve bad credit
If you have bad credit, improving that three-digit number is a wise goal. You don’t have to wait (nor should you) to do it. Restoring your credit is a process that can begin now.
While a single late payment can drop your score by dozens of points, building that score can take a lot more time and effort. In general, you improve your chances of getting good credit by:
Filing disputes to correct errors you may find on your credit report, unless you require a secured credit card to prove your creditworthiness. Limit the number of new accounts you open in a short period of time. Pay off debts as quickly and efficiently as possible
If your credit history is limited, you can sometimes have your rent payments and even your utility bill payment history added to your credit report. As long as you make these payments on time, it can serve to improve your score quickly and give you good credit.
Your credit score may seem like three random numbers at times, but you have the power to control many factors in your financial life. Building and maintaining a healthy credit score can not only make your life easier, but it can also save you money in the long run. Bad credit is worrisome, but it can absolutely be fixed with a little time and dedication.
If you’re concerned about your credit score and want to work on improving it, consider working with a credit repair professional. Start with a free credit check.