Bad credit can be a serious hamper on your financial freedom and peace of mind. Since your credit score affects the kinds of loans and credit cards you qualify for, having bad credit may prevent cardholders from being able to make big purchases or have a line of credit for emergencies.
However, you don’t have to keep bad credit forever. In fact, you can fix and avoid bad credit by following some smart strategies. Let’s break down those strategies in detail.
What Is a Credit Score, Really?
A credit score, in a nutshell, is a summary of factors that estimate your “creditworthiness”. A credit check is used by credit bureaus to determine:
- How likely you are to pay back a loan
- How trustworthy you are with lines of credit
- Whether you qualify for a credit line increase
Basically, credit scores serve as proxies for borrowers’ trustworthiness in the eyes of lenders. They’re important for being able to secure leases with good terms. For example, if you have bad credit, you’ll only have access to installment loans or lines of credit available from certain lenders. Many of them may have bad terms, late fees, and higher interest rates and APR.
Fair credit or good credit is the opposite. It will secure you excellent loan deals, good lines of credit, and let you take advantage of better lease opportunities, like lease-to-own furniture agreements from Becca’s Home.
Most lenders look at your credit report to see if you meet a credit minimum for their loans or cards. Bad credit scores or poor credit may make it hard to get an unsecured credit card, although a secured card may still be accessible.
The best cards have no annual fees, good rewards, and credit upgrades over time. They’re great for making big purchases or helping you pay for groceries and gas when money is tight.
Therefore, it’s a good idea to try to improve your FICO score (one of two credit score types) over time.
The Three Major Credit Bureaus: What Are They?
The three major credit bureaus are Experian, Equifax, and TransUnion. Put simply, these organizations collect credit information from “credit furnishers”, which are any businesses that collect credit information from you.
Credit information, in this sense, is things like:
- Your history of payments toward a credit card
- Your history of payments toward bills
- How much savings you have
- And more
The three major credit bureaus collect this information, then use algorithms and other factors to create a score. Note that each credit score is different from each bureau, but the FICO and VantageScore rating systems combine the scores from each bureau to come up with an “average” credit rating.
How Are Credit Scores Rated?
As noted, credit scores are rated based on a variety of financial factors. Different credit bureaus and rating systems may weigh those factors differently, however. The most common factors for rating credit scores include:
- History of payments, both on time and late
- Credit utilization (i.e. how much of your available credit you use at any one time)
- How many open credit accounts you have
- And more
What Affects Your Credit Score?
Your credit score can be affected by many things, including:
- Payment history
- The amount of credit owed. This is heavily related to the credit utilization ratio, which is calculated by dividing your total revolving credit by your total revolving credit limit(s)
- Length of credit history. The longer you have used credit, the higher your score will be
- Credit mix, which represents what types of credit or loans you use
- How many new credit accounts you have recently opened
Above all else, your payment history affects your credit score the most. Basically, if you consistently make on-time payments toward your utility bills and any loans or lines of credit you have open, you’ll have a high credit score given time. The opposite is true if you constantly make late payments or miss payments.
Does Debt Lead to Bad Credit?
It can if you have too much of it or if you pen too many new credit accounts in rapid succession. Note that you have to have some debt or loans to have credit at all. You build credit by using credit responsibly, not by never using credit whatsoever.
To avoid bad credit, you should:
- Avoid having too many open credit accounts, like too many credit cards
- Avoid having too much debt under your name at once. Essentially, you should pay off any big loan you have before taking out another big loan
Late Payments and Bad Credit: How They are Related
Late payments are the number one force that drives your credit score down. They show the big credit bureaus and lending companies that you can’t be trusted to pay back your debts on time. Therefore, you should try to avoid late payments at all costs by:
- Not taking out debt or lines of credit you can’t afford
- Using auto-pay features to make sure your debt payments are always on time
Once you have bad credit, it can be tough to overcome it. Credit card issuers will be unwilling to offer you a higher credit line if you already have a card. It will also be harder to get a new credit card, like a store credit card, without high fees or bad features.
Note that if you have bad credit, some secured cards may still be available, such as Secured Visa cards.
How Use of Credit Affects Your Score
The way you use credit can also influence your credit score total. If you have a healthy mix of credit types (i.e. credit cards, loans, and utility bills) then you’ll have a higher credit score.
On the other hand, if you use credit irresponsibly or have a lot of one type of credit, such as all big personal loans, your credit score will be lower. You should use credit responsibly by:
- Only taking out loans or lines of credit when necessary
- Never take out more credit than you can afford to pay back promptly
What Is Pulling Credit? Does It Affect Your Score?
When a lending company or credit card company decides to check your credit score, they “pull your credit”. Pulling credit means checking your credit score, essentially.
This does negatively affect your score by a few points, but only temporarily. If you sign up for loans or lines of credit infrequently, the score penalties should decrease by the time you need another loan.
Note that pulling credit only affects your score for “hard credit checks”. Soft credit checks do not negatively affect your score and are often used for loan prequalification. Some companies also check your bank information to determine creditworthiness.
Does Bad Credit Cause Big Problems?
It can, certainly. Bad credit can cause you problems in two major ways.
Bad Credit Can Make It Harder To Get a Loan
For one, bad credit can make it harder to get a loan or open a line of credit, plus qualify for good leases or lease-to-own financing options. This, in turn, will limit your financial options going forward. It may even make it hard to buy a house.
Bad Credit Can Be Stressful
Bad credit can also be very stressful on a personal level. No one likes to have bad credit hanging over their head for years on end. Bad credit will lead to poor credit score terms, limit your maximum rewards, and net you a low initial credit line for each card you have.
How Do You Improve Your Credit Score?
Luckily, you can improve your credit score by adopting a few smart financial strategies.
What Are the Best Credit Cards for Improving Your Score?
For example, you can sign up for secured credit cards or other “credit building” cards that may help you improve your score. Secured credit cards or credit building cards:
- Report to the big credit bureaus regularly
- Don’t allow you to misuse your line of credit
If you want to build credit with a credit card, check out some of the best credit cards for building credit or the best credit cards for bad credit.
How Setting Up AutoPay Can Help You
You should also set up auto-pay for your utility bills and other regular loan payments. Setting up auto-pay means you’ll never forget to make a bill or debt payment, so your score won’t suffer a penalty as a result.
Do You Need Multiple Credit Cards for Good Credit?
No. In fact, it’s better to only have one or two credit cards open at any one time. The more lines of credit you have open, the more they weigh down on your credit score.
Conclusion
At the end of the day, you don’t have to let bad credit hold you back from getting the furniture you need ASAP. Instead, you can visit Becca’s Home!
When you lease your furniture through Becca’s Home, you get access to a diverse catalog of excellent pieces: perfect for filling any room in your home. On top of that, you can lease your furniture through convenient 17-month lease terms OR take advantage of our 90 day same as cash financing option. Purchase your furniture in full at any time! Visit us today for more information.
Sources:
Credit Reports and Scores | USAGov.
