Bad credit can have a severe impact on your life. It doesn’t take long for your finances to spiral out of control, and the effects can be significant.
In today’s guide, we’re going to go through everything you need to know about bad credit – and explain what you can do to get out of your bad situation.
Let’s get started with some of the basics.
What is bad credit?
Banks and other lenders use a credit report to decide who they lend money to – and the terms of the loan. Borrowers who have a good credit score tend to get most success in their applications, and the best terms; lower interest rates, for example.
Bad credit can occur on two occasions. The first is that you have never borrowed anything before, and have no credit history. The second is that you might start missing payments, and the lender will send the details to the major credit reference bureaus. These include Experian, Equifax, and the TransUnion.
How your score is worked out
Organizations like Experian, Equifax and TransUnion build up a report of your entire financial life. They track your payments made to credit cards and even things like utility bills. Your legal status is also in the report – if you have ever been under arrest, for example, it will show up. All these little things add up to give you a total score.
Credit scores range from 300-to around 850, and the lower it is, the more of a risk you will be for lenders. Scores of 700 and above are ‘good’ credit ratings, while anything under 600 is thought to be a significant risk.
The effects of bad credit
Bad credit can affect your life in many different ways. You will find you can’t borrow as much money as in the past, and you may not be able to get a home loan. Even smaller purchases such as store cards and cell phones need to pass a credit check, and you will fail if your history isn’t up to scratch.
However, that’s only the tip of the iceberg. Landlords use credit checks on prospective tenants, and many won’t rent their properties if you fail a credit check. Also, more employers than ever before are beginning to look at your report before hiring you. It has never been as important to have a good credit score than it is today.
What happens when I have a poor credit score?
You may not even realize that you have a bad credit score. However, there are a few signs which should give you some clues. You might start getting phone calls or letters from debt collectors, for example. Or, you might find your job applications being turned down despite that fact you match all the criteria.
Even if you fail to get a cell phone contract, it could be a sign you have credit problems. If any of these events happen to you, it is essential that you make checks with all the relevant bureaus. It’s also important to understand that accidents and mistakes happen all the time. It might not even be your fault that your credit score is dropping like a stone. But, without checking, you will never be able to challenge your score and put it right.
Can I still borrow money?
It is possible that you can still borrow money with a bad credit reference. However, the terms – and interest rates – will be pretty high in comparison to those enjoyed by people with good credit scores.
There are plenty of credit cards targeted at people with bad credit, for example. And, payday loan companies also offer fast loans to people with a poor financial history. Your best bet is to use a matching service to find the best deal. According to the Personal Money Store, it can help you find a lender that matches the best for your needs.
Can I rebuild my credit score?
The first thing to do is to address the reasons why you have a poor credit score. So, put a repayment plan in place and target the debts that are causing damage to your file. Getting a new credit card can help, too. As long as you pay off the balance every month – in full – it will give you points back on your report, and start to prove you are responsible for debts.
It is a long-term process, however. Unfortunately, there are no quick fixes – other than a complete change in the way you deal with your finances.
Featured image source: Flickr