You may have heard people talk about “bad credit,” “good credit,” or a generalized credit score, but unless you know the mechanics of this important device, you may not even be aware how this figure is affecting your life. Bad credit can influence your financial stability, how you get loans, your access to apartment rentals, and even your career prospects. So just how is a credit score calculated, and how can it affect your life so significantly?
First, let’s take a more in-depth look at how bad credit can affect your life:
- Loan availability. One of the first things a lender looks at when determining whether to give you a loan is your credit score. If your credit is in bad shape, you may not be able to get the loan you want—including mortgages, auto loans, and personal loans for things like businesses or home repairs.
- Credit card availability. If you have bad credit, you may still be able to open new credit cards, but the rates and terms you get will not be as favorable as those you’ll get with better credit.
- Apartment rentals. Landlords will often check your credit to evaluate your payment reliability (and your dependability as a tenant). If your credit score is too low, you may not be able to get into the apartment you want.
- Career prospects. Some employers will check your credit score when running a background investigation. Though it likely won’t make or break your prospects, it could be an influencing factor in their hiring decision.
- Money is the leading cause of stress in relationships, so if your credit score is in disrepair, it could introduce a wave of new issues into your relationship. If you can’t get a loan, and your credit is influencing your spouse’s credit, it could be a cause for argument and resentment.
How Credit Is Calculated
So how is your credit score determined? There are several factors involved, but some of the most significant include:
- Your credit history. The longer you’ve had credit, the better, and there isn’t much you can do to influence this factor. Younger people will always be at a disadvantage to older people in this dimension. However, the earlier you open a line of credit, the better.
- Your payment history. One of the biggest influencing factors in your credit score is how reliably you’ve made payments on your debts. Defaulting on a loan can devastate your credit score, and even one late payment can cause your credit score to drop. Consistency and timeliness are both highly important.
- Your current debts. Creditors also look at your current debts, compared to how much credit is open for your accounts. The lower this figure is, in general, the better. For example, having $1,000 of debt with $10,000 available credit is often better than having $800 of debt with $1,000 of available credit.
- Recent actions you’ve taken. If you’ve taken recent actions, such as frequently checking your credit score or trying to open new accounts, it could temporarily affect your credit.
Repairing Bad Credit
There are a few ways to repair your credit score, but all of them take time:
- Stop accumulating more debt. First, stop accumulating any more debt. Don’t apply for new lines of credit, and reserve your credit cards for emergencies, exclusively. If you’re struggling to make ends meet, this can be tough, but try to keep your expenses to an amount less than your current income, or find a new source of income to make up the difference.
- Pay everything on time. The best thing you can do to improve your credit score is to pay all your bills on time. Pay at least the minimum, and don’t be late with any of your payments.
- Pay down your debts. If you can, work to pay down your debts as much as possible. The lower your debt ratio is, the higher your credit score is going to be. Plus, paying off your debts will prevent you from paying additional interest unnecessarily; the faster you pay them off, the less you’ll pay.
These strategies may seem counterintuitively simple, but they’re the best tactics you have to improve your credit score over time. Even with them in place, it could take months or even years before your credit is restored to a “good” range. Remain patient, and follow best practices, and eventually, your credit will improve.
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