What Is Bad Credit?
In general, if you have a credit rating of under 580, you have bad credit. It is not that hard for your credit rating to sink that low if you are not careful. Whether caused by a financial crisis or irresponsibility, bad credit is easy to get and hard to get out of.
Bad credit reaches far further into your life than you might think. Take a look at some of the costs of bad credit
1) Higher Interest Rates
This is obvious, but it is worth mentioning. Higher interest rates can cost you hundreds, if not thousands of dollars on loans.
For most lenders, your interest rate is the primary thing that affects their credit decision. You still might get approved for a loan with bad credit, but it is going to cost you much more than a good credit loan would cost.
2) Tougher Loan Approvals
A high interest rate loan is bad enough, but if your credit rating is bad enough, you might not even be able to get that. Some lenders might not be willing to take a risk on you and you could get denied at a time when you need it most.
In general, unless you have horrible credit, you will almost always be able to get some kind of auto loan. The terms will be atrocious though. Other loans though, like personal loans and home loans will be much harder, if not impossible to get.
3) Could Leave You Without A Phone
Cell phone companies look at your credit when deciding on whether or not to approve you. That could cost you a cellular phone contract.
Of course, this may not be the end of the world. You could simply go with a pre-paid service. These services are pretty good these days and the quality is near that of the major carriers. Only problem is that you would have to come completely out of pocket for a phone.
If you want a higher end phone, being forced to go with a pre-paid service might mean you have to front 500 to 800 dollars in cash up front.
4) Difficulty Getting Employment
Many employers will look at your credit rating as part of the application process. Fair or not, a bad credit report can cost you a job.
This is a particular reality if you work in the finance industry. An employer in such an industry would want to know that you can handle your own finances. If you can not, how could you be trusted to handle the finances of others.
Other factors on your report can affect your job worthiness. Things like bankruptcies and foreclosures could make an employer question your stability.
5) Costly Vehicle Insurance
This is another one of those things that is just not fair. Why should having bad credit cost you higher insurance premiums? Many auto insurers use your credit rating as a factor with your premium. The worse your credit, the more you pay. Fair or not, they claim it is a statistical factor.
6) More Deposits For Service
If you have bad credit, you are much more likely to have to pay a deposit on things like utilities. Your gas, cable, electric and water providers will typically require you to put down deposits to get new service activated. This could be as little as a hundred dollars or it could be several hundred dollars.
If you move frequently, the hassle and cost of deposits can be really aggravating.
7) Housing Difficulties
Is it starting to look like everyone uses credit to make decisions? Unfortunately, it is only going to get worse if you have bad credit.
Housing is another thing that can be difficult to obtain if you have bad credit. You could be outright denied or required to put down higher deposits in order to get an approval.
If the deposits required are high enough, you might not be able to afford an apartment or home. While that might not leave you homeless, it might force you into some lesser quality housing.
8) Poor Access To Emergency Money
If an emergency happens and you need some quick cash, you have limited options with bad credit. You will probably be cut off from things like credit cards. That means that you would have to turn to higher cost sources of funding.
Millions of people turn to high cost lending options like payday loans because of bad credit. With effective interest rates usually well above 400 percent, this can be very costly.
Fixing That Bad Credit
As you can see, there are far more costs to bad credit than high interest rates. This is why it is so important to fix your credit rating.
Unfortunately, doing so can be difficult, especially when the primary thing that you need to fix it is money. Your bad credit could be costing you hundreds of dollars a month in income and/or fees and this is the very money that you need to get yourself back on track.
So, the worse your credit is, the harder it is to get back on track. With some discipline though, you can do it. Here is what you need to do.
- Check Your Report
There may be many things on your report that are inaccurate or that possible do not even belong to you. You are allowed a free credit report every year from each bureau. Take advantage of that and pull those reports. You would then need to dispute inaccurate information in writing. After you do, if the information can not be proven, it must be removed and the credit bureaus have just 30 days to investigate.
- Pay Your Bills On Time
This is the single most important thing that you can do to get your credit on track. Make it a point to pay those bills on time going forward and you can start seeing improvements on your score in as little as 6 months. Take advantage of every tool at your disposal like bill reminders and automatic payments.
- Eliminate Credit Card Debt
This will be the toughest thing that you do but it is extremely important. The second biggest factor in your credit score is credit utilization and lenders prefer that you are using under 30 percent of available credit. Under 10 percent is even better.
Make a plan to pay off your credit cards. The most effective way is the debt avalanche method where you pay the minimum on all cards except that with the highest interest. Pay as much as you can on it until it is paid off and then move to the next highest credit card.
- Do Not Close Old Accounts
You might think that the thing to do is close an account after you pay it off, but generally this is not the case. Closing an account could lower your available credit and could decrease your average age of credit.
In most cases, if there is no annual fee, you should keep your credit accounts open.
- Monitor Your Credit
Now it is time to be patient and keep an eye on things. Sign up for a credit monitoring service and keep close eyes on your credit. Then just be patient and wait it out. Improving credit is a waiting game, it will take time but eventually you will get there.
There are a few more things that you can do to fine tune your score, like increase your account diversity but taking care of the above factors will get you most of the way to a high credit score.