Matters Credit. Today we are looking at what bad credit is, how it can affect you and how to avoid it.
What is Bad Credit?
Bad credit refers to a history of failing to make bill payments on time and the likelihood that such a person will fail to make future payments. A bad credit mostly reflects a low credit score. One thing to note is that companies may also have bad credit based on a poor history of payment and present financial situations. On a scale of 300 to 850, bad credit is noted to be below 580.
Factors leading to bad credit
Are you trying to figure out why your bank is unable to give you a loan or why your interest rate is higher than usual? Maybe you may not know these, but they are some of the causes of bad credit, and you need to get acquainted with them. Pitfalls that may be ensnaring you with low credit:
1. Failure to stick to the credit agreements. Whenever you make late payments, the cumulative history may be more than just a drawback but adds more weight to your low credit score.
2. Bankruptcy declaration. Your rating is affected by declaring bankruptcy, and so is the use of Individual Voluntary Arrangement (IVA).
3. Going for the wrong credit. You must have made a mistake of choosing a credit card without limits and manageable interests and fees.
4. Being subject to County Court Judgement (CCJ). You will want to watch out and avoid these judgements; they can label you as under 580 for up to six years.
5. Paying only a minimum each month. Minimum means you pay more and longer, and so does your credit rating go low.
6. Identity theft. Being subject to fraudulent practices may damage your rating a compromise to your credit score.
7. Lack of credit history. Many people actually have poor credits because they don’t have a credit history; haven’t borrowed yet in the entire lifetime.
Effects of Bad Credit.
How bad can bad credit be to you?
v You will be paying more interest on loans and credit cards: With a disregarded reputation, it is much better for a creditor to charge you more.
v Your credit and loan applications may be turned down. With bad credit, your probability of paying is low, and so is the trust of your bank.
v Your rental application may not be approved. No landlord fancies coming down to a tenant every now and then demanding payment, they better not allow you in at all.
v You may get security deposits on utilities. The trust goes a long way to your gas, water and electricity suppliers. You will have to pay first for the services.
v You may be denied a cell phone contract. Bad credit goes ahead to affect your family’s upbringing; your own children may not enjoy your credibility to take care of them with the phones.
v You may be turned down for employment. Employers who want to protect their reputation may turn you down; you deserve a clean slate of a CV.
v You will pay higher premiums on insurances. With a bad credit, insurers may want to charge you more for you to keep up with the premiums.
v Starting your own business may be more than difficult. Trouble begins when you need a license, and a viability assessment is done; no state would be more willing to let you start a business that would only lose.
v Calls from debt collectors may be too disturbing. There is nothing as exasperating as calls from debt collectors; the terms change with every 5-minute interval call.
v Purchasing a car may be near to nigh. Not unless you go with cash, maybe after winning the lottery, your car dealer would not wish to sell to someone with low repayment rating.
10 Ways of Avoiding Bad Credit.
Here are the tips to avoiding a bad credit:
1. Pay your bills on time. Every end-month comes with bills, be sure to settle then on time; 35% of your credit score is all about your payment history.
2. Know the bills that report to the credit bureaus. Note them; the credit cards, loans and mortgages, among others. They are very sensitive hence prioritize paying them.
3. Take reasonable debts. Credit scores take into account the balance between your credit limits and credit card balances and how the loan balances compare to the original loan amount. You will need to keep your credit card balances low and make regular loan payments to lower debts.
4. Manage your finances. Starting with your income; pay for the basics first, then the pleasantries or upgrades. One thing to note is the rate and time of your income depletion and uptake of credits.
5. Spend using the 24hr rule. Give yourself enough time, not less than 24hrs to come up with conclusive decisions on making a purchase. Add yourself a new bill with the consideration of how it will affect your capability to cater for other bills.
6. Cut down the application of your credit card. All the credit card applications you make take up 10% of your credit score inquiries. On a mention, many credit card applications may mean many balances and payments to make.
7. Train yourself to live within your means. You need to recognize whenever you are having trouble, work hard and spend smart. If possible, bring in a new source of income.
8. Establish an emergency fund. During emergencies, your credit card is always the first choice of funds; go against this notion and establish an emergency fund for your dire situations.
9. Build healthy savings. In as much as your savings are not taken into consideration in your credit report; saving, significantly determines your possibility of going for your credit card.
10.Reach out to your creditors. Establish an understanding with your creditor in the event that you will not be able to pay on time. You can also set up a new payment channel that is bearable to you.
With an understanding of bad credit, the causes and the effects; go ahead and practice these strategies to avoid bad credit.