Creditworthiness is one of the most important aspects of your financial being to take good care of. It is a number that you should know by heart all the time. This is the number used by businesses and financial institutions to decide whether to provide you with their services and products, or not. Even landlords and insurance companies look into this before deciding to extend their facilities or services to you. I am talking about your credit score.
What is a credit score?
A credit score is an evaluation of your credit-worthiness. Banks and other lending institutions look at your rating before they decide to extend you credit. The scores are between 300 to 900. If your score is too low, this means that the potential risks of loans to be in default and the bank’s possible loss due to bad debts are high resulting in the disapproval of credit and loan application. This includes credit cards, lines of credit, mortgage and other unsecured loan products. Even landlords look at credit score being an important deciding factor in making a leasing decision.
Here is the breakdown of the credit scores and what it means:
As you can see, the higher the score, the better is your rating. Anything below 620 is considered a low or bad credit score. Your credit score is a measure of trust. The higher your score, the more likely financial institutions will trust you to be able to repay any credit being extended. Having an excellent credit score can also empower you to shop around and negotiate the interest rates.
What happens if you have a bad credit score?
You will have difficulty in availing of credit when you have a bad or poor credit score. There are institutions that will still cater to you and provide you with credit but with a higher interest rate. If your score is affected by bankruptcy or consumer proposal, the difficulty level is twice as much. Not a lot of financial institutions are keen on extending credit to people falling under this category.
Factors negatively impacting your credit score
There are different factors affecting your credit score. Each one contributes to how your score is calculated. Here is the breakdown of what negatively impacts your credit score:
Not paying your bills on time – this is the number 1 factor that lowers your credit score. This covers all your monthly bills including your credit card and utility bills, student loans, lines of credit, car loans, etc
Credit History – shorter credit history means there is a shorter record of your borrowing habits. Since one of the indications of having good credit is having a good payment history, if you have only had credit for a shorter amount of time, your credit score will not be as good as those having perfect payment history for a longer period.
Not paying your credit card in full – paying only the minimum required payment tells the financial institutions that you cannot afford to pay back what you owed on a monthly basis. This will also impact your bottom line since you will now be charged with interest on your next credit card bill. Credit card interest rates ranged from 14.99% to 29.99%, depending on your creditworthiness.
High ratio of the amount owed against total credit available – if you use up over 50% of your total credit available, financial institutions would deem you as credit hungry and this will lower your score. Try to use just about 30% of your total credit available. For example, if you have a $5,000 available on your credit card and another $5,000 on your line of credit, try to have a balance of less than $3,000. If you can not pay off your credit card, at least pay it off using your line of credit. This way you will be paying a lesser interest rate. But always aim to pay off your credit card balance and have less than $3,000 in outstanding credit on a monthly basis.
Declaring bankruptcy or under a loan repayment program – this hits your credit score big time. The only way for your credit score to improve is when you have paid off your loan under the repayment program, pay your other bills on time and maintaining a low ratio of the amount owing against total available credit.
Not reviewing your credit score – a lot of us do not know that we need to review our credit score. We need to make sure that we are in good credit, especially when we need to apply for loans/mortgage. We can also verify the transactions affecting our score, to review for incorrect reporting or irreconcilable transactions due to identity fraud.
Services Available When You Have Bad Credit
There are services out there that can help you monitor and improve your credit score. Borrowell has been very good at keeping you up-to-date with your credit score for free and they also provide recommendations on how to improve them. They can offer you information on which credit card companies can give guaranteed approval based on your credit score. They also show offers from other companies to provide you with unsecured loans – but just be aware of the very high-interest rates.
Improving your credit score is basically doing the opposite of what damaged your credit score in the first place. It is easy to damage your credit score, but it takes time to rebuild it. Here’s what you need to do to improve your score:
- Make sure you pay your bills on time
- Pay your credit card balance in full
- Do not use more than 30% of your available credit
- Do not close old credit cards – this helps in building a credit history
- finish paying off your balance for loans under the repayment program
- always review your credit score
Having a good credit score is very important. This impacts how you are being perceived by financial institutions. Our life revolves around credit: credit cards, loans, mortgages, etc., and we need to take good care of our creditworthiness.