Many people are generally unaware of their credit score while many more assume they have bad credit because they’ve missed a bill payment or two. We all hear stories from credit agencies about how bad credit can affect our lives and why we should avoid letting our credit score go bad. So, let’s take a look at the various types of credit ratings a person can have and what can be done to change it (if a change is desired).
When you get a loan you need to know your credit score. The Fair Isaac Corporation (FICO) credit scoring system ranges between 300 to 800. This number is used to predict your likelihood of repaying your loan. If you know your credit score and it’s below 620, it’s considered to be in the “Bad Credit” range. The average American's credit score is 695.
Here's a Common Breakdown of FICO Credit Scores:
- 700 to 850 is considered an excellent credit score.
- 680 to 699 is regarded as a good credit score.
- 620 to 679 is thought of as an average credit score.
- 580 to 619 is a low credit score.
- 500 to 579 is regarded as a poor credit score.
- 300 to 499 is considered a bad credit score.
What Can Affect Your Credit Score?
Generally speaking, the higher your score; the better loan options you have. Here are the factors that affect your credit score:
- 35% Payment History
- 30% Current Debts
- 15% Credit History
- 10% Types of Current Credit
- 10% New Credit Applications
There are the three pieces that result in your payment history:
- How late your payments are
- How many payments you have missed
- How long you haven’t missed any payments
If you have not made payments for a certain loan or credit card the main credit bureaus, Experian, TransUnion and Equifax, update that negative mark every 30 days. If you took 2 months to make a payment on that past-due account, your credit report would have a 60 day mark on it. The longer you wait to pay on a debt will reflect on your score negatively. Frequently paying late will also damage your credit score.
The amount of debt you have right now accounts for 30% of your credit score. Credit utilization is the percentage of your available credit that you are using. If you always carry high balances on your credit cards, then your score will suffer. High balances indicate to a lender that you are at a higher risk of default. So, keep your credit card balances low and your credit score will raise.
How long you have had access to credit isn’t the only factor that determines your credit history. Your payment patterns and how often you apply for new credit also has an impact on your credit history. If you’ve had good credit for a long time, but if you miss a few payments or apply for several new loans or credit cards, this will have a negative impact on credit score.
Types of Current Credit
Having the right balance of credit variety accounts for 10% of your credit score. You would want a car loan, a mortgage, and a few credit cards to show you are using your credit responsibly. Like any great recipe, having the right mix is in your best interest.
New Credit Applications
Opening new credit accounts all at once will have a negative impact on 10% of your credit score. Too many accounts could indicate financial trouble if you’re creating credit accounts at the same time. You should only take on additional credit if you absolutely need it.
Advantages of Having Good Credit
Perhaps the best way to understand what is truly bad credit is to understand what is truly good credit, and all the benefits that come with such a standing. A good credit score is anything above 680, with an excellent credit rating being anything above 700. Such a credit rating does not come with just having one or two credit cards and so forth. These kinds of credit ratings reflect ownership of a home, a car or two, loans that have been paid, credit cards that do not get maxed out, and a history of good financial decisions. For the middle class, excellent ratings can be achieved when someone reaches their 30’s (in age) and has made very good choices with their credit without any mishaps or defaults. Generally speaking, the only way one can get excellent credit at a younger age is to be financially well off.
Excellent (and even good) credit ratings come with the benefits of lower interest loans from everything to property, cars, “toys” (such as recreational vehicles or wave runners), and so forth. Without at least good credit, many institutions won’t give an applicant a loan for something like a sailboat or an RV. But there are more than just tangible benefits to be had with excellent credit. Programs like “credit protection” will ensure your credit does not get effected if you forget to pay a bill or miss a payment on a loan. Maintaining excellent credit opens up doors to higher standards of living; better neighborhoods, better automobiles (it is a fact that Mercedes and Lexus are not just luxury automobiles; they are solidly built machines that often go more than a hundred thousand miles without needing so much as a tune up, and come with lifetime warrantees on the entire car, not just for things like the drive train, etc.) At this point, it’s probably not too difficult for you to figure out why attaining and maintaining good credit is important, so let’s move on…
When You Have No Credit
Having “no credit” is where everyone starts out as an adult. When you reach the legal age of adulthood, your credit score is zero, but this does not mean you have bad credit. It simply means you have no credit. Having no credit means you’ve had no experience with any kind of credit situation; you’ve never had to pay bills, purchase something for which you did not have enough cash, or make payments on anything such as a loan. Having no credit is nothing to be worried about or feel bad about. Everyone starts with having no credit. If you have no credit and are wondering how you can build a good score, the process will take patience, time, and good financial choices.
The first ting those with no credit will want to do is verify their credit score. Make sure it stands at zero and that there are no previous entries that might affect your credit score. Once that has been accomplished, it is recommended that a person get the utility bill, the phone bill, and things of similar nature in their name.
Some of you may be reading this and wondering how on earth a person can reach adulthood without having a credit score. Think of a college student, perhaps one that has gone to graduate school, whose parents have paid for everything; literally everything, including spending money. There are some fortunate individuals in this world who find themselves in such a situation. They can reach the age of 25 and later without having any credit score whatsoever.
So if you want to build your credit score fast, get your bills put in your name. Get your own mobile phone account. Pay all your bills on time. Get a credit card, don’t max it out, and pay it off every month. Don’t maintain the balance, pay it off. You will be on the road to an excellent credit score.
When You Have Bad Credit
By painting a picture and knowing what good credit and no credit look like, it becomes clearer as to what constitutes bad credit. Some of you might be thinking that you have bad credit but actually don’t. Any score below 580 is bad. Any score below 499 is very bad, with the exception of zero (by the way, if you’re starting out with no credit and building your score, it’s best not to look at these numbers as “bad credit”. The credit card companies won’t, because your credit report will show nothing but credit building and no instances of missed payments of defaults). Bad credit is generally an accumulation of missed payments and/or defaulted loans. One loan in default will lower your score, but it will not bring it below the “bad threshold”. Bad credit is generally a report that shows a history of poor financial decisions, unpaid loans, defaulted and maxed credit cards, and unpaid utilities. There are lesser known factors that can hurt your credit score such as drastically raised interest rates. If you miss a payment or two on a credit card, the credit company will raise your interest rates significantly. This will appear on your credit report and affect your credit score. Some people have loans with variable interest rates in which they must pay a “balloon” payment at some point during the loan. If this specific payment is missed, it affects your credit score a bit more severely than missing a standard payment.
We hope we’ve given you a good idea of what the different types of credit ratings are. If you need to know how to get a loan with bad credit, don’t despair. It is possible (and done all the time) to repair your credit rating and build it back up again. In the meantime, if you do have bad credit, come see us at CASH 1 for loans for people with bad credit; we specialize in dealing with customers with less than perfect credit ratings and can work to find the right loan for you, whatever your financial needs are.