You have definitely heard or seen those commercials offering loans and/or other types of financial services. You have probably even checked those that offer financing with no credit or bad credit. But what exactly is the term “bad credit” mean? In essence, is used in describing individuals with less-than-stellar credit behaviors, allowing lenders to see them as a much bigger risk when it comes to a loan application.
So, how does one know if he/she has bad credit? Well, this is where checking your credit score for free comes in handy. If your score is below 600, then it means you have a bad credit score. While people may have an idea or two about how they end up with a bad score, sometimes they do not necessarily understand the process of why they get there.
For starters, let’s discuss the different factors or criteria that help determine your credit score. That way, you will know how to improve it and identify what your bad credit options are the next time you apply for a loan.
Factors That Determine Credit Score
Payment History – One thing lenders are most interested in is your willingness to pay back the money you owe them. Because if this, your payment history will play a crucial role in determining your creditworthiness. If you have been unsuccessful in making on time payments, or perhaps you already have a history of defaulting on any other credit accounts, then your credit score would be significantly affected. And, as a result, you will be identified as a credit risk.
Amounts Owed – There is definitely no fast or hard rule when it comes to how much outstanding credit is too much. However, keep in mind that a higher debt load will always mean having the inability to repay on time. Lenders are very much interested in how much you owe; they are less inclined to hear your answers about how much you are able to earn each month. If you let your range of debt spiral down, you are going to enter a bad credit territory.
Credit Mix – It holds true that having a diverse portfolio of credit accounts and loans can be used in making yourself attractive to lending companies. After all, they are fond of seeing how able you are in handling several types of debts. However, this could potentially bring you down as well, especially if your history suggests an ugly reputation. Sure, you have three or more accounts right now, but based on the figures, you appear to have a hard time paying on time. It would look better to have a single account than having multiple accounts with bad history.
Length of Credit History – This one right here is perfect for individuals who are new to the credit world. Basically, it is expected that you have to start somewhere in order to get access to a vast array of lines of credit. But as newer lending laws restrict the types of credit people can obtain until they reach the age of 21, more and more young adults these days will have much shorter credit histories they need to work with. A good way to build up a credit history is by using a secured credit card. You can consider a secured credit card as your entry point to the much-needed history for the bigger purchases you will need in the future.
New Credit – What most people do not know is that almost all relatively new accounts – particularly those that are opened under your name – can be a make or break. Why exactly? That is because they can either bring a positive or negative effect on your score. Of course, it would really depend on how each of them contributes to the factors mentioned here. During the initial process, it is likely for you to ding your credit score lightly. If you are lucky, you might not end up with much of a decrease in your credit score. But if your new line of credit is helpful enough in raising your available credit amount, then it is possible to make your debt-to-income ratio look positive. And in case you did not know, it is essential that you do not use your entire available credit amount immediately. Doing so can hurt your overall credit score, so try to keep your spending limit below 30%.
What Bad Credit Means To Consumers
Now that you understand the different factors used in determining your credit score, it is time to know what this could mean for consumers like you. If a lender labels you as a credit risk, know that it can be really hard. You will have difficulty in qualifying for a variety of loans and/or credit offers. Assuming that you are able to acquire financing, one that is solely designed to help you with your bad credit, your loan can look completely different than an individual with a good credit score.
The following are some negatives that can be an unfortunate reality for people with poor credit scores, especially those who are looking for financing.
Lower Available Credit Limit – Lenders are going to be reluctant when it comes to offering you much borrowing power. Most companies that provide financing for bad credit will not offer more than a few hundred dollars.
Higher Interest Rates – Having a bad credit score also means having to pay more with higher interest rates. People with good or excellent credit scores can easily enjoy paying no interest (or very low interest rates). But as far as bad credit consumers are concerned, they can pay the maximum allowed by the law itself.
Few Perks – This is definitely one of the saddest realities to having a bad credit score. You will get fewer perks than those with a good one. For instance, you will be ineligible to get airline and hotel rewards or cash back in most cases. Keep in mind that the best perks are – and always will be – reserved to premium consumers (with high credit scores).
Bad Credit Does Not Have To Follow Your Forever
Are you worried about your bad credit? Do not be – it does not have to last forever. There are steps that you can take to turn around your bad credit history. Keep in mind that most negative marks on your credit report will disappear after seven years (though some could take longer). Just work hard and try to be timely with your payments. Basically, do not take on more than you can handle. With hard work and determination, there is no doubt that can achieve excellent credit score greatness!