What if you were trying to buy a home but you just found out that a bad credit score could ruin your chances of becoming a homeowner? We all understand the importance of having a good credit score. This is one of the financial details that will help make the homebuying process cheaper for you.
Let us explain how that works.
When you have a good credit score, it means your credit report shows that you are a responsible credit holder. Most of the time, this means you can be trusted to pay back any loan that you borrow. If you have a bad credit score, the reverse is reflected about you. It means you cannot be trusted to responsibly pay for your loan after you borrow it.
You have to understand that the lending industry profits from the interest that borrowers pay towards their loan. If borrowers run off with the loan without paying it back, the creditor or lender will lose money and that is bad for their business. They protect themselves by imposing high-interest rates. This will allow them to get a bigger profit. Even if the borrower fails to pay back the loan in full, their loss will not be too great.
If you have less than favorable credit score, the lender will not withhold the approval of your loan. You might be granted the loan but it will be with a high-interest rate. And we all know what that means. If you have a high interest on your loan, you will end up paying more in the long run. You will waste more money in the process.
As we enter into 2016, CreditSesame.com shared their report about the credit health of the Americans. Apparently, the average credit score of consumers is 625. This is based on the data taken from their members – specifically 2.5 million of them – which is only a part of the 7 million members of Credit Sesame. According to the data, this is considered by most lenders as subprime for a VantageScore 3.0 (range of 300 – 850). If translated into the FICO score, which basically has the same range, this is 650.
As you can see, this is not really a bad credit score, but it is not a good one either. There is obviously a lot of room for improvement. If you have the same credit score, you need to increase it further if you want to get a good interest rate on your home loan – or whatever loan you are planning to borrow.
3 immediate actions when you have a low credit score
If you just found out that you have a bad credit score, there are three things that you have to do immediately. As much as possible, do not delay in completing these tasks. You need to do these before you can think about boosting your credit score. The quicker you act, the less damage the low credit score can do to your finances.
Check what makes your credit score low.
Start by finding out what is causing your credit score to be low. You can do this by asking for a copy of your credit report. You can get a free copy through the Annual Credit Report site. Once you have a copy of your credit report, you need to look at the details. There are many factors that can affect your score. If you make late payments, that will cause your score to go down. If you have a high balance and it is near your credit limit, that can also be a factor that will give you a bad credit score. Yet another reason is applying for a lot of credit accounts all at the same time. That will cause your score to go down. The reason why you need to check what makes your credit score low is to help you repair it.
Compare your credit report with your financial statements.
The next thing that you have to do is to compare your credit report with the financial statements that you have with you. This is the reason why it is important to file your statements. If they are being sent to you electronically via email, make sure you save a copy of that. Look them up and check if the details are the same as your credit report. Sometimes, our bad credit score is caused by errors in our records. If there are discrepancies, you need to call your creditor or lender so they can investigate the discrepancy. Have it corrected if the error is found to be true. You never know – your credit score might improve if the mistake is corrected.
Know how you can bring your credit rating up.
Finally, you have to immediately research how you can bring your credit score up. Correcting the discrepancy is one thing that you can do. There are other things that you can do in order to turn your bad credit score into a good one. It all depends on what is causing your score to go down. If it is the late payments, you need to pay your dues on time. If it is a high balance, you may want to make huge contributions towards your loan so your debt amount will go down.
It is very important that you work on knowing what you need to take care of your credit score. You do not want to turn it into a bad credit score again.
According to an article published on ChicagoTribune.com, a lot of consumers are confused about their credit score. The article mentioned that 77% of their respondents said they did not know that having a high outstanding balance can ruin their scores. This data is based on the report from Bankrate. It was also revealed that ¾ of consumers did not know that closing their accounts will also lower their score.
Apparently, we need to learn more about our credit scores if we really want to manage it properly. If you do not know the basics surrounding your score, you may end up making the same mistakes that got you the bad credit scores once more.
What can you do to improve your credit score
If there is a need to improve your credit score, that time is now. According to an article published on CBSNews.com, the Federal Reserve is planning to raise the federal-funds rate benchmark. This is the first time they will do it in 7 years. Financial institutions base their respective interest rates on this benchmark. When the Fed decides to raise their rates, you can expect that everyone in the financial industry will follow.
In case you want to keep your loan rate from being high, you need to work on your bad credit score. Improving your credit score is not an overnight task so you need to work on it as soon as possible.
Here are a couple of things that you need to do in order to raise to credit rating.
- Monitor your credit report. Sometimes, people suffer from a bad score because they become a victim of identity theft. This means someone used your identity to borrow money and left you to pay for it. Since you did not know about it, you will not pay for it. If you do not monitor your credit report, you will not see these unauthorized transactions. If left unpaid, these can bring your score down. But if you find out about it immediately, you can report it and be saved from the trouble of paying for a debt you did not borrow and the consequences of a bad credit score.
- Correct errors in your report. There are times when people suffer from a low credit rating because of errors in their report. For instance, some creditors fail to report your on-time payments and they are reflected as late ones. You need to correct this so your credit score can improve.
- Negotiate with creditors to remove negative marks – if you have a valid reason. For instance, you got sick and you have expensive medications. You had to stop making payments because of your bloated expenses. You can explain this to your creditor and even show them your medical records. Ask them to remove the bad credit marks on your report. They may relent if you make your payments current.
- Pay off your debts in time. This is another way for you to improve your credit score is to pay your dues in time. Late payments have a big factor in bringing your score down. You need to make your payments current so you can score high in your credit report.
- Lower your credit utilization by lowering your balance. The rule is, your balance should only be a third of your credit limit. That means if your credit limit is $15,000, you should only maintain $5,000 in your balance. or better yet, pay off your dues completely – if it involves credit card debt of course.
- Do not close your credit cards – just don’t use them. To keep your balance down, you need to regulate your credit card use. Do not use them if you want to bring your balance down. You do not have to close your card. Just keep them where you will not be tempted to use them.
- Use your credit card, but pay off the balance in full before the end of the grace period. If you have to use your card, make sure it is an amount that you can afford to pay during the grace period. That way, your purchase will not incur interest rates. It will not end up as a credit card debt.
Follow all these tips so you can improve your bad credit score. If you have to borrow money, you do not have to worry about a high-interest rate because you have a good credit score.