If your credit is bad, you’ll have a hard time getting approved for mortgages, credit cards, and other loans. Even if you do manage to secure a loan, the terms and interest rate are not likely to be in your favor – meaning you’ll pay a lot more money in interest costs than you will if you have good credit. But that’s not all – having bad credit can also cause your insurance premiums to go up. And some employers also require good credit before they’ll hire or promote you.
With so many essentials of modern life connected to having good credit, its importance cannot be overstated. Thankfully, if your credit is bad, there are several options to help you repair and rebuild it.
Bad Credit Defined
Bad credit typically happens when there are negative findings on your credit report. These findings may include late payments, account delinquencies, high debt balances, or recent bankruptcies. The result of these findings is a low credit score, also called a FICO score.
FICO scores range from 300 to 850. The higher the number, the better your credit. A general breakdown of this scoring system can be segmented into five levels:
- Excellent: 800+
- Great: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: Below 580
By checking your credit score, you can quickly determine where you fall in the credit score range. If your score is below 580, your credit is considered “poor” and is commonly referred to as bad credit.
How Credit Scores Work
Your credit score is calculated based on the weighted value of five independent variables. If you have bad credit, it is because of negative factors in any of the following variables:
- Payment History: Late payments will dramatically lower your credit score. (35%)
- Balance Amounts: How much you owe as a percentage of how much credit you have available will impact your credit score. Using more than half of your available credit will negatively impact your score. (30%)
- Length of Credit History: Regular payment towards debts for longer periods of time is more predictable than shorter periods. Shorter credit history will lower credit score (15%)
- New Credit: Opening multiple credit accounts in a short amount of time will lower your score. (10%)
- Mix of Credit: Having different credit types can positively impact your score. Having only one type will lower your score. (10%)
Bad Credit Loans
Online loans for bad credit are out there. These can be a tolerable option for individuals who need more credit while trying to reboot their debt load repayment efforts. But, bad credit loans online will usually charge their customers high-interest rates. If you’re trying to pay down your debts, the last thing you want to do is add to your debt load with new, more expensive loans.
If you’re interested in which loan company is best for bad credit, several qualified companies are in the industry. Just remember that sometimes a new loan is not the answer to managing existing debt. While lenders are out there loaning new money to borrowers with bad credit, these businesses are profiting off of their target customer’s financial difficulty.
Although these lenders are providing a valuable service, stop to consider if there is a better solution for your situation. These lenders still have a minimum credit score requirement! That means not everyone will qualify for a loan, particularly those with a bad credit rating. It may be more worth looking at debt consolidation or debt settlement in such situations since there is no credit score minimum and no new debt requirement is involved.
In many situations, debt consolidation can be an excellent choice for a person with bad credit. Borrowers with several debts may find it helpful to roll them all into one loan that can be amortized over a predefined number of years and repaid in monthly installments.
This approach’s advantage is that borrowers do not have to deal with multiple loans and lenders with different repayment terms and timelines. Debt consolidation can make it easier to gain control of your finances and reestablish good credit.
A debt settlement is another method to make it possible for a person to start over. When a person’s financial circumstances make it challenging to repay their debts fully, it may be best to seek a debt settlement. This option helps a person renegotiate their financial obligations for a payoff sum less than what they owe. Borrowers who have outstanding loans that have been discharged (typically after 6 months of non-repayment) may be good candidates for this option.
The advantage of choosing a debt settlement is that borrowers also do not need a minimum credit score to qualify for this service. For many people with bad credit, this is an attractive option in their search for a bad credit solution.
Rebuilding Good Credit
You can rebuild your bad credit by making changes that positively impact the variables that make up your score. For example, if you have been making late payments on your credit card bill, aim never to miss making payment on time again.
Over time this will have an outsized impact on your credit score, bringing it up into higher-scoring ranges. If your balance amounts exceed half of your available credit, pay down your debts appropriately. This change will help too. Taking steps like these will go a long way to helping you rebuild your credit.
If you’re looking for the best cards for rebuilding credit, look into options to get a secured card. Although these cards require a deposit upfront, they can be an excellent option to help you rebuild bad credit through a consumer credit card.