Bad credit can impact you in many ways, from a lower FICO score to an inability to get loans or even a higher cost of borrowing if you get a loan or mortgage with bad credit. If you have bad credit, there are things that you can do today, like getting debt free and establishing a good track record of payment history. It is never too late to start rebuilding your bad credit to turn your credit problems around, so start learning today what you can do to get started.
Use Bills.com to learn how to improve your bad credit, including learning how credit is established and how to get a loan or a mortgage with bad credit, and to find the resources to solve your credit problems. We'll get you started on how to solve bad credit and how to get loans with bad credit, but you should start out by getting your credit report, assessing where the credit problems are and start restoring your credit, pay-down your debts and then optimize the cost of your loans and liabilities over time to get back to financial health. The most basic way to help improve your credit: pay your bills on time and pay off debt!
How a credit score is calculated
If you have bad credit, it's important to start out with a fundamental understanding of how a credit score or a FICO score is calculated, so you can take the proper steps to protect and improve your score. Your credit rating is calculated based on several variables, including:
Payment history
1) Payment history, which counts for approximately 35% of your score, is the most heavily weighted factor used in calculating your credit score. Consistently paying your bills on time has a positive influence on your score, while late or missed payments will hurt you in this area. If you have delinquent payments, the older the delinquency the less the negative impact on your score will be. Collection accounts and bankruptcy filings are also taken into consideration when analyzing your payment history.
Credit utilization
2) Total debt and total available credit, which counts for about 30%. This section looks at how much debt you have compared to the total available credit on your accounts. If all of your accounts are maxed out, you will be considered a poor credit risk, because it appears that you are struggling to pay off the debt you have already incurred. If your account balances are relatively low compared to your available credit, this part of the risk analysis should help your overall credit score. The score calculation also looks at these two factors independently. Having too much available credit, whether you have used it or not, could hurt your credit score, as statistical studies have shown that people with excessive amounts of available credit are a higher credit risk. Unfortunately, the bureaus do not define exactly what they consider excessive, so best tip is to use credit conservatively and to keep your debt to credit limit ratio low.
Length of time of accounts have been active
3) Length of positive credit history, which counts for about 15%. The longer you maintain accounts in good standing, the better your score will be. This shows that you are able to make a long-term commitment to a creditor and are consistently responsible about making your payments. If you have accounts with long history (5 or more years) and no missed payments, you should keep these open and paid off.
Variety of accounts
4) Mix of types of credit, which counts for approximately 10%. Having several different types of credit, such a credit cards, consumer loans, and secured debt, will have a positive influence on your credit score. Having too much of one type of credit can have a negative impact.
The number of accounts that have opened recently
5) The number of new credit applications you have recently completed, which accounts for about 10% of your score. Applying for too much new credit in a short time period makes indicates that you could be credit risk, as you may be desperately trying to keep your head above water. The models make an exception for people who are shopping around for a loan, so if you are simply applying to see who can give you the best rate on a new loan, you need not worry too much about damaging your credit score.
How to Improve Credit Scores and Credit Ratings to Fix Bad Credit -
Here is a brief outline of some basic steps to building and maintaining credit.
Have active accounts
1) Obtain and wisely use a credit card.
To start building good credit with your credit card, you'll need to obtain the card, use it, and make the first payment before you'll see any effect on your credit score. If you have no credit history, you may have to sign up for a "secured card" as a first step. A secured credit card is one that requires you to deposit money (typically a minimum of around $300) into an account controlled by the credit card company or bank to even obtain the card. This deposit "secures" any debt you place on the card. It is a way for a creditor to lessen risk when dealing with someone who has poor credit or no credit.
A secured card is just as good as any other credit card when it comes to building credit. Like with any credit card, the payment history on your secured card is reported to the credit bureaus. By making on-time payments (on-time payments are the No. 1 factor in determining a credit score) and carrying a low debt load (your debt balance-to-credit limit ratio is also a big credit score component), you build the history and profile that produces good credit.
Another way to build credit from scratch can include getting a low-limit retail store card or a gas card. Just be sure to pay the monthly balance in full so as to avoid the high monthly interest charges that many of these types of cards carry.
You can also build your credit score, by having someone co-sign on a debt with you. Because the co-signer takes full responsibility to repay the debt, if you do not, co-signing is risky and is something that the co-signer should be wary of doing. Every person who considers co-signing on a loan should make sure to understand the risks of co-signing. Still, the risks for the co-signer does not reduce the positive effects for your credit score of having a co-signed account report in good standing to the credit bureaus.
Review your credit report regularly
2) Review & understand your credit report.
Review your credit report once a year. The higher your credit score, the better. A score below 680 usually results in a borrower being charged a higher interest rate or denied credit. If the report includes items that are inaccurate, request the report be corrected. You can receive a free copy of your credit report at AnnualCreditReport.com, where you are entitled to one free report from each of the three bureaus every year. I recommend that you stagger your requests, accessing one report every four months in an alternating fashion. Bills.com has some terrific information about how to dispute items on your credit report.
Borrow money and pay it back
3) Take a loan.
Another good way to build credit history is to pay off a small loan. Borrow from your bank or credit union to purchase a used car or a larger purchase, such as an appliance. Pay the loan on time and in full. Pay any student loans on time every month. (Remember: On-time payments are the No. 1 factor in determining a credit score.)
Maintain a stable employment history
4) Build job history.
A stable job history is another factor that lenders will consider when giving a loan. Creditors look at job history to understand a consumer's stability and income.
Guard against identity theft
5) Protect yourself from identity theft.
Identity theft is at an all-time high, and it can destroy credit ratings. Remember that identity theft occurs both "offline," and through the Internet. Protect yourself from unscrupulous individuals who could go through your trash, steal account numbers online or get personal information through complex "phishing" scams. Record all important financial information and account numbers in a secure place. Shred all documents that contain personal information. Never give out personal information in e-mails or in a phone call you did not initiate.
Establish a budget
6) Create – and stick to – a budget.
A good way to maintain a healthy financial lifestyle is to create - and stick to - a household budget. Many people fall into credit score disarray by spending beyond their means, building up debts, and maxing out credit cards. In budgeting, list ongoing monthly expenses (fixed expenses like rent or mortgage payments). Add variable expenses that are "must-buys" (food, gas, medicine). Leave two categories for savings and spending cash (for unexpected expenses and entertainment). Add monthly net income (the amount left after taxes and other paycheck deductions such as health insurance and 401(k) contributions). A free budget guide is available at Bills.com.
Bad Credit Mortgage and Loan Options -
Once you understand what goes into a credit score and have been armed with tips on how to fix bad credit, the next step is to get some quick advice on how to actually qualify for loans even if you have bad credit.
FHA loans are ideal for people with bad credit
First, I suggest that anyone with less than good credit look at FHA or Government Loan programs. FHA loans are available to people with bad credit, where bad credit can disqualify a person from most loan programs. Please read about FHA mortgages.
Co-borrowers on a loan
If your spouse has good credit, that may help mitigate your own bad credit. So ask yourself, does your spouse have a FICO score? If they have one, is their credit score excellent, poor, or somewhere in between?
It may be possible for the two of you to qualify together for a loan as co-borrowers, but what kind of loan will depend on the income each of you earn, the credit scores both of you have, and the equity available in your home. In general, the workaround for bad credit loan needs is to have the person with the better score apply for the loan by themselves and keep the borrower with the lower score on title only.
To learn more about credit reports, credit scoring, and what it means to you, I encourage you to explore the wealth of material offered at the Bills.com credit resource page.
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