According to a YouGov plc and ScoreSense survey, 53% of Americans were turned down for a loan or credit card due to a bad credit score.
Although it seems the easiest choice to skip a payment or open another credit card when in need, it’s best to always think of how a decision will affect your credit. There’s a good chance that there will come a time when your credit score affects your life.
Having good credit is essential for not only taking out loans and other new lines of credit but for achieving goals in life without being tied to high-interest rates. Without good credit, you may not qualify for a loan, or you could be forced into coming up with a large down payment or accepting high-interest rates.
The first step in correcting bad credit is knowing what’s causing it. In the guide below, there are several main reasons why your credit score is low. Continue reading to learn more about a poor credit score and how to fix it.
High Credit Utilization Ratio
A general rule of thumb is to keep your utilization ratio under 30%. Once you’re using more than 30% of your credit, your credit score will quickly drop. Here’s how to keep your usage under that 30% guideline.
If you have a credit card with a $500 limit on it, then you’ll need to keep at least $350 on it at all times. This means you’ll only want to use $150 a month and replenish it each month.
We all know $150 isn’t much to spend. If you know you’ll need to use more than that, one solution is to ask your lender to raise your spending limit. Increasing your limit to $1,000 then allows you to use $300 each month as long as you replenish the $300 each month as well.
Having No Credit at All
A low credit score isn’t always due to items on your credit. Sometimes, a low credit score is due to having no credit at all. If you’ve never taken out a credit card, then now might be the time to do so.
Lenders will often treat people with no credit the same way they treat those with bad credit. Having no credit doesn’t show a lender that you’re able to pay the debt back responsibly. This is a major risk for lenders.
To quickly build credit, you can take out a small credit card, such as one for $500 or $1,000. Then, only use it to pay for gas or groceries and pay it back immediately. This will help you build credit.
Late and Missed Payments
Payment history makes up for 35% of your credit score. If you constantly miss payments or are late paying them, you’ll see your score drop. Always make sure to pay your bills on time and never miss a payment.
To help you pay on time, you should set up a payment schedule. Write down all of your bills, the amounts, and the due dates on a calendar or whiteboard and place it somewhere you can see it (such as the refrigerator or wall). Each time you make the payment for the month, erase the due date and change it to the next month.
This helps you stay on top of paying bills. You can also reach out to cable providers, phone service providers, insurance providers, and other companies to see how you can lower your payments.
Accounts in Collections
If you fail to make payments, creditors will use debt collectors to contact you for payment. Debt collectors will contact you several times for payment, but if a payment isn’t made, a creditor can then choose to send your account to collections.
This happens when the creditor is no longer seeking payment from you. Although you no longer have to hassle with debt collectors, you now have a negative impact on your credit score. To remove an account from collections, you can contact the creditor and begin making payments.
Multiple New Lines of Credit
Each time you take out a new line of credit, your credit history gets checked. Lenders must run your credit in order to determine if you qualify for the loan and what your interest rate and loan amount should be. There are hard inquiry pulls and soft pulls.
Most credit unions will do a soft pull, whereas other lenders might do a hard pull. Hard inquiries will negatively affect your credit more than soft inquiries will. If you open multiple new lines of credit within a short amount of time, then you’re risking a drop in your credit score by having so many pulls on your credit at once.
Filing for Bankruptcy
Filing for bankruptcy has pros and cons. Someone might file for bankruptcy to relieve themselves of debt collectors. Although bankruptcy frees you from your debt and past-due payments, your credit score takes a major hit.
Not only will this negatively impact your credit, but it can also prevent lenders from wanting to lend to you in the future. Some bankruptcies stay on your credit for ten years while other types will stay on it for seven. This depends on the type of bankruptcy you file for.
Only choose bankruptcy as your last resort.
Let Us Help You Repair Your Bad Credit Score
Having bad or poor credit isn’t uncommon. Many people have a bad credit score for one or more of the reasons given above. However, you don’t have to be stuck in this category.
There is a way out. Working with credit repair services can help you repair your credit on your own the right way. At Credit Score Blueprint, we offer credit restoration tools to help you build your credit with proven DIY methods.
Sign up now to repair your credit score!