When people talk about credit, they often talk about their good credit scores. Good credit scores open some doors for you, like lower interest rates on mortgages. Yet, bad credit has a much more profound effect on your life.
Even worse, around 40% of people don’t know their own score. Among the financially inexperienced, a couple of common questions might include:
“What is bad credit?”
“What causes bad credit?”
If you wonder these things, keep reading for some surprising reasons you have bad credit. Plus, we’ll give a few tips on what you can do about it.
What Is Bad Credit?
There are three credit bureaus in the US:
These bureaus collect information about your financial life. For example, they get information about loan payments and your credit card limits. They take all that information and give different weights to different categories.
Then, the companies take that info and run it through an algorithm. The algorithm takes that weighted info and gives out a 3-number score. The score typically falls somewhere between 300 and 850.
Bad credit is when you score falls below a certain number. The bad credit range is typically between 300 and 600, give or take a little at the top.
Bad credit can make it hard for someone to get loans, credit cards, and even rent an apartment.
So, what causes bad credit?
1. Late Bill Paying
Paying your bills late might occasionally prove unavoidable in some cases. Say that you’re out of town. You might forget a bill comes due during that trip.
Consistently paying your bills late, however, puts a big dent in your credit score. It’s one of the most heavily weighted categories for credit bureaus. It makes up about 35% of your score.
Lenders and credit card companies read a bad payment history as a sign that you won’t repay loans or credit cards.
2. Carrying High Balances
Many people keep at least one or two credit cards. Credit cards can prove invaluable if you end up in an emergency.
Unfortunately, some credit card holders use them as a substitute for money in the bank. They pay bills with the cards with no clear plan about how they’ll pay that balance.
After a while, the balances approach or reach the limits on the cards. Carrying high balances on your card increases something called a credit utilization rate. The higher the balances, the higher your rate.
This is another big one for your credit score. A high credit utilization rate dings your score.
3. Closing a Credit Card
Closing a credit card account can feel like the right move. If you remove the card, you remove the temptation. Right?
It turns out closing a credit card can hurt your score. Remember that credit utilization rate? When you close a card, you also remove that available credit from your rate calculation.
So, your rate might go from using 80% of $5000 to using 93% of $4000.
That increased rate will drop your overall credit score, even though the choice might make sense from a personal point of view.
4. Only Using One Type of Credit
Let’s say that you got a credit card when you were 20. You religiously make payments on it and never max it out. The credit card company gives you periodic increases on your limit.
Ten years down the road, you enjoy a huge credit limit. In fact, it’s the only credit you use because you never need anything else. Maybe it’s even good enough that you bought a used car on it.
Believe it or not, that can also hurt your overall score.
The credit bureaus like consumers who maintain a mix of different types of credit. Not taking out a loan or two over the years means the bureau doesn’t know how you handle loans.
5. Errors on Your Report
The credit bureaus will provide anyone a copy of their credit reports for free every year. They’re obligated by law to provide them.
If you never get a copy of that report, you have no idea what’s on it. Errors show up on those reports sometimes.
Let’s say a company sent you into collections a few years ago. You worked out a deal and paid off the debt. If the collection agency didn’t report that you paid off the debt, it sits on your report as a negative mark.
Negative marks from errors hurt your score as much as negative marks from real things.
Fixing Bad Credit
There is nothing magical about fixing bad credit. There are many practical steps that you can take that will boost your score, such as:
- Prompt bill payment
- Getting credit card debt down
- Take out a small starter loan
- Look for errors on your credit report
- Work with a credit repair company
If you pay bills late because you forget about them, consider autopay options. You can lower your credit utilization rate by paying down debt or getting a credit limit increase.
Getting a starter loan when you don’t need the money is the best-case scenario. You let the loan money sit in the bank to cover the principal. Then, you’re only on the hook for the interest.
Getting your credit report and looking for errors costs you nothing but a little time. Getting errors removed can increase your score immediately.
Credit repair companies help you negotiate terms, create a plan, and stay on track.
Fixing Bad Credit Is Good for You
Bad credit will haunt you in many ways. It’ll drive up the interest rates on credit cards or make them unavailable to you at all. It can torpedo any hopes of a mortgage for your own home.
Fixing your credit takes time and some discipline. Yet, the rewards will improve your life. You’ll pay less interest when you get credit and lenders will want your business
Are you struggling with bad credit and unmanageable debt? The Credit Agents specialize in credit repair. Contact us today for more information or to get started.