Why about 100 million Americans have bad credit, despite the fact that they are conscientious citizens and try to timely deal with their obligations? What can do such people when they need financial support, but creditors refuse because of a low credit rating? Let’s first deal with the fact that such a credit rating is in general, and a bad credit rating in particular.
In the US, there are several credit bureaus that collect information about borrower behavior to help lenders assess the risks associated with lending to an individual borrower. When assigning you as a borrower a certain credit score, many factors of your behavior are taken into account when you get a loan and use credit cards. The credit bureau report shows your credit history.
When analyzing your credit history, the following criteria are used that affect your credit score. For example, FICO’s credit rating takes these criteria into account in this proportion:
35% – payment history
30% – the amount of total debt
15% – the duration of the debt
10% – the number of your requests for loans in recent times
10% – the types of loans that you have
The total score taking into account these parameters varies from 300 to 850 points, while a score above 720 is considered excellent and below 629 already refers to a bad credit. Anything between 629 and 720 does not place you among low-risk borrowers for the lender, so your chances of getting a new loan may be something like a roulette.
Why get a bad credit score?
Bad credit is often formed gradually with adverse credit behavior of the borrower. It can also happen abruptly if you suddenly stop repaying your loan obligations. Consider the basic methods of credit behavior that lower your credit rating.
- You do not pay the loan
The reasons for this behavior may be different, most often it is some financial difficulties that you face. In such a situation you begin to refuse any costs due to the inability to cover them, despite their importance and necessity. If payments on loans and credit cards fall into the category of such expenses, then your credit rating starts to decline rapidly and your credit becomes bad.
- Late payments on loans
Such factors as late payments make a significant impact on the most significant parameter of the credit rating – payment history. The payment history, as you might have noticed, occupies the main share in the credit rating – 35%. To eliminate the negative impact of this factor, if you have several loans you can consolidate them into one, or set up automatic debiting of payments from your account. Then you will not miss the deadline for making a payment and you will not have delinquencies.
- You submitted several loan applications at the same time.
Submitting multiple applications for loans in a short period of time looks like an urgent need for money. This immediately affects the credit rating. Since the influence of this factor on the overall rating reaches 10 percent, you should not underestimate its value.
- Your account has been sent to a debt collection company
If your lender refused to wait your repay debts to the loan and transferred your account to the company of debt collectors, this will also have a very negative effect on your credit rating and will affect it for seven years. This will change for the better if you pay in full the debt.
- The debt has been deducted from your account
Perhaps in the past, once you already had a problem with a credit or credit card and the lender wrote off your debt. Many settle for this, thinking that they were simply exempt from debt. But this is not the case. The debt remains with you for seven years, if you do not repay it. And all this time it has a very negative effect on your credit rating.
- Your lender has revoked your right to use the house
When your business changes for the worse, the lender who issued the mortgage to you may deny you the right to use it. This state of affairs will negatively affect your credit, as it means that your creditworthiness has decreased significantly and the lender began to perceive you as a high-risk borrower.
- Errors in the credit report
You should regularly monitor your credit history by annually requesting a credit report from one of the US credit bureaus. If you find any errors there, you need to fix them as soon as possible in order to prevent a significant reduction in your credit score.
- You pay first to debt collectors
Many people faced for the first time with the methods of debt collectors succumb to the psychological pressure from collectors and stop paying their current loans. They prefer to pay in the first place collectors to reduce the pressure on their part. However, this behavior adversely affects the credit rating. If you don’t pay collectors it doesn’t affect your credit, unlike if you don’t pay an existing loan. Therefore, despite all the trouble of interacting with debt collectors, priority should be given to current loans.
- You have high credit card spending
When you spend money from a credit card for more than 30% of the credit limit you become a more risky borrower for lenders. If you have a need for a large expenditure of funds from a credit card, try to restore the balance as quickly as possible so that the use of the credit limit does not exceed the designated limit.
- One credit card
Although this will reduce the risk of arrears, at the same time, the utilization rate will not allow you to get a higher credit score. Therefore, for your credit rating it would be better to use a smaller proportion of funds from different credit cards.
- Leave old credit cards unopened
The length of your credit history is a factor that significantly affects your credit score. In this regard, when you close an old credit card, your credit history becomes shorter, which reduces your credit rating. If the maintenance of the old card does not need to pay, then it is better not to close it.
- The credit card with the balance has been closed by you
Do not close the credit card, which is still present balance. The fact is that the credit limit that was opened to you on the card will immediately drop to zero that will affect your credit rating as well as a decrease in credit limit for any other reason. This will immediately affect your credit score.
- You declared yourself bankrupt and need a loan for bad credit
A bankruptcy announcement has the most negative impact on your credit, which is generally possible. Such a move will not leave a stone unturned in your credit rating for the same seven years. Therefore, if possible it is worth making maximum efforts to avoid such a turn of affairs. The influence of all these factors on your credit rating can be reduced by following some simple rules. In addition, even in a not entirely favorable financial situation there is almost always a possibility to improve it.
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