Is Good Credit Essential to Prosperity?
Credit history is what allows businesses like lenders and credit card companies to manage their risks. It is a metric that they use to evaluate how trustworthy an individual is with their finances. It helps companies decide which people are the most likely to pay them back and which have a poor history of this. Without being able to look at a borrower’s credit history, financial institutions wouldn’t be able to lend money or operate profitably. A good credit history is basically a written recommendation that can be used to borrow money, rent an apartment, or apply for employment. A good score isn’t essential, but it will make financial situations easier and will also save you money in lower interest rates.
What Can Lead to a Bad Credit Score?
Bad credit results mainly from a poor payment history. Defaulting on bills or making late payments for things like credit cards, auto loans, or mortgage can contribute to this history. Currently bills like rent or mobile phone payments do not affect your credit, unless they are sent to a collection agency. This may change in the future as some alternative credit scoring models factor other types of bills into your overall score. Things like bankruptcy or loan defaults are considered particularly bad and will cause your score to drop the most. These can affect your history for 7 – 10 years and make it more difficult for you to receive any type of loan or new credit. Carrying a balance on your credit card is another problem that looks very bad to lenders. Bad credit can be expensive because it will cost you money due to higher interest rates and higher auto insurance premiums.
Can a Poor Credit Score Be Fixed?
If you do have a poor score, it is not permanent. Credit scores can improve fairly quickly if the right steps are taken. Any outstanding credit card balances should be paid off if possible. Credit card debt is one of the most expensive types of debt which averages around 10% – 20% interest. Paying off this debt first, will help to reduce your debt load and will also have a positive effect on your credit. 30% of your FICO score is made up from your credit to debt ratio. This means that you should only charge 1/3 of your available credit each month, then pay off your balance. For example, if you have $10,000 of available credit you should charge no more than $3000 each month. The $10,000 of credit would include all of your credit cards and credit lines.
Another way to improve a score would be to check your report and see if there are any errors. It can be very common to find mistakes on a credit report. Some are serious enough to cause your score to drop. You can order all 3 bureau reports for free at annualcreditreport.com. This can be done at no charge, one time per year. The Fair Credit Reporting Act allows all U.S. citizens access to their credit data one time per year. Annual Credit Report is one of the few places that allows access without the use of a credit card.
Once you have your reports from Experian, Equifax, and Transunion, make sure that all of the information is accurate. If you do find a mistake, you can send a dispute letter to the bureau with the inaccuracy. This letter should contain a copy of the report with the error circled. Your letter should clearly state why you feel that the information is not accurate. It should also include copies of documents that would prove your side of the case and help you show that it is indeed an error. Once this letter is sent, it can take around 30 days for the bureau to follow up with the company that filed the inaccurate information and make the proper corrections.
It is possible to get by with poor credit, but it can affect your life in many ways. Things like borrowing money, getting approved for low interest credit cards, and even being hired for a job can be affected by poor credit. It will also make your life more expensive with higher interest rates and insurance premiums. A bad score can be fixed with some work. It is even possible to recover from serious financial difficulties like bankruptcy. Some individuals have been able to achieve a good score after bankruptcy in as little as 2-3 years. In spite of the fact that it is stuck on your report for 7 to 10 years.
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