Budgeting is an extremely useful skill that we should probably be taught in school. Learning budgeting skills would save us quite some time and money in our adulthood.
However, even if you don’t know the first thing about budgeting, it’s never too late to learn how to handle your finances properly. Being good at managing your budget can save you from falling into the bad credit trap. There are ways to get out of it, but it may not always be easy.
One of the best ways to deal with bad credit is not to let it happen in the first place. But life is unpredictable, and there are some events that you unfortunately can’t stop from happening. Those life events may influence your finances and force you into debt. Later on, this debt affects your credit score if you’re not able to pay it off on time.
The best thing you can do is to try to fix your credit early on, before it gets too far away from you. It’s easier to jump from a fair credit score to a good one, than to climb back from the poor credit category. Recognizing the signs of bad credit can help you in this process. If you notice these signs now, you’ll be able to realize when you’re off the track so you can take action.
What Is Bad Credit, and Where Can I Check Mine?
Before we move on to discussing the warning signs of having bad credit, here’s what banks and other lenders consider bad credit. We’ll also provide information on where you can check your credit score.
What Credit Score Is Considered Bad?
The most commonly used credit score scale is the FICO scoring system. For most lenders, a bad FICO credit score is anywhere between 300 and 620. For others, there are two subcategories for bad or poor credit score: from 300 to 550, which is referred to as “bad credit,” and 551-620, often called “subprime credit.”
On the other hand, if your credit score is between 621 and 740, it’s considered fair or good, while anything above 740 (to 850) is considered an excellent credit score. People with an excellent credit score generally get the best offers, the lowest interest rates, and the highest loan limits.
How Do I Know My Credit Score?
Every U.S. citizen has the right to have an insight into their credit report once every 12 months for free.
Some states allow checking your score even more often, and there are situations where you’re entitled to a free report due to some circumstances, such as current unemployment or a previous error in your report.
Submitting a request for a credit report can be done via mail, over the phone, or on the only official website in charge of providing credit reports: annualcreditreport.com. Submitting an online request is the fastest way to get your credit report. You don’t need any complicated paperwork to get your report. You must simply provide some basic information, such as your name, address, and your social security number.
The access to your credit report is almost immediate, and you can check all the important information about your financial history, from your credit score to the total amount of debt you may have.
11 Warning Signs of Bad Credit
If you haven’t been paying attention, your credit may have gotten worse and you don’t even know it. Suddenly, you may notice that you lack money for basic needs, and you must get a loan when you need it the most. Why is this happening?
There are plenty of signs that should raise a red flag in your head and make you order your credit report to see what’s going on with your credit. Of course, if one or two of these signs apply to you, it doesn’t automatically mean the situation is alarming. However, it’s always good to be careful.
- You’re fighting about money with your family members or lying to them.
This one may be the very first sign of trouble. Whether it’s your spouse or your parents, you’ve started fighting with them about money. They may have noticed that you’ve done lots of compulsive shopping lately or you’ve failed to pay your bills on time. If you’ve also tried to hide your financial problems and started lying to your family members about how much money you spend or owe, it’s time to think about what you’re doing wrong and check your credit report. When you’re managing your finances properly, there’s no need for lies because there’s enough money to cover all the expenses.
- You’re not adding anything to your savings account.
Or you don’t even have one.
You know how many financial advisors recommend putting some money aside each month – some even say it should be 20% of your salary. You’re left penniless at the end of the month and you can’t wait for your next payday, so you cannot add anything to your savings account, or at least your piggy bank.
The fact that you currently don’t have any debt should encourage you to leave a certain amount of money – you can start with smaller amounts and gradually raise the number until you reach the savings goal you’ve set.
- You don’t pay your bills on time.
Every now and then, you’re late with a payment. Some people are simply forgetful; they have the means, but they can’t remember the due dates, so they miss a payment.
But, if the problem is lack of money, your credit could be damaged because of it. If you get your credit report now, you’ll see that each one of these missed payments shows up on the report.
If you’re having trouble organizing your money and you spend the whole salary before you manage to pay all the bills, you may want to prioritize better. Your bills should come first, and entertainment and wants are covered by what’s left. Those “wants” can’t be your number one priority because that will lead you toward additional debt and bad credit.
If you do pay your bills and debt installments first, and you still can’t afford to pay everything, you need to think of a way to increase your income or decrease your expenses.
- You can’t seem to find a job.
Prospective employers are allowed to see your credit report, with some limitations, and take your financial history into account when deciding whether to give you the job.
If your interviews are going great, the hiring managers seem to like you, but somehow they turn you down after you sign the permission for them to run a credit check, your bad credit may be the problem.
Some employers, especially if the job is related to the government or handling business finances, consider bad credit a deal-breaker, and they only hire candidates who have a stable credit history.
So, next time you’re having a job interview, mention your situation and explain why it’s come to that – maybe the interviewer will tolerate your bad credit if they know the reason.
- Landlords won’t rent you an apartment.
Your potential employer is not the only one who is able to look into your financial history. Today’s landlords won’t take any risks with their tenants. When you want to rent a place, a landlord may also want to see your credit report first. Of course, their access is limited and they can’t see everything, but that doesn’t mean they won’t find something they don’t like and turn you down. They associate bad credit with the inability to cover your expenses, including the rent, so they don’t want problems. They’d rather move on to find someone with a spotless report. Remember that a prospective landlord also needs your written consent to look into your credit report.
- You maxed out your credit card (or you’re close to it).
Credit cards usually have limits, unless you’re a millionaire. These limits are there for a reason, and it’s not a good idea to reach them, or even come close.
You may be wondering why? First of all, when you max out a credit card, you are not able to use it anymore, because you’d go over the limit in that case, which results in having to pay additional fees. If you maxed out a card, it probably means having to cover additional interest charges would be a problem.
You can fix this situation by increasing your limit, so your credit card isn’t maxed out anymore, but the ideal solution would be to pay down the balance (in whole if possible) as much as you can afford at the moment.
As prevention is always better than cure, keeping an eye on your credit cards and limits can save you from maxing out a card.
- You don’t keep track of your finances.
It’s not that unusual that we ask ourselves where all our money has gone. It’s the small expenses that sometimes affect our budget more than bigger payments, such as rent or mortgage. It’s easier to pay for something when it’s not much money, but these small payments tend to pile up.
You shouldn’t let this become a habit. Keeping track of your money and taking your time to plan your budget is the best thing you can do for yourself. Not only will you be aware of where your money goes, but you’ll also be able to finally save some money.
It’s important that you know how much you owe at any given moment because it will prevent you from getting in trouble. Being responsible with your money will allow you to enjoy it more – with proper planning, it’s more likely you’ll have something in your pockets at the end of the month.
- You get unfavorable credit offers: Your credit limits are low and your interest rates are high.
When you have good credit, banks, credit unions, and alternative lenders consider you a creditworthy candidate and offer you the best terms of taking out a loan. You’ll also likely see offers for many different credit cards with high limits and low interest rates.
But if your credit score is bad and your financial history is not very shiny, the lender will hesitate to offer you an unsecured loan, for example. Your interest rate will probably be higher, and you won’t be able to borrow as much money as someone with better credit score.
Your income is an important factor here as well, but even if your salary is high, and you’re still struggling with lots of debt you’re not able to pay off in time, credit offers you get won’t become more favorable.
However, you may still want to consider using at least one credit card if you believe you can afford it. Making regular monthly payments (at least the minimum, and ideally the full amount) could help you improve your credit score.
- Your debt to income ratio is too high.
Your debt to income ratio is a good sign of whether you can manage your finances properly or not.
How do you get the exact percentage? It’s quite easy. All you need to do is to add up your monthly payments that are directed toward paying off the debt. The number you get is then divided by your gross monthly income.
For you to be able to cover your expenses and afford your debt repayment, the ratio shouldn’t be above 43%. The lower the percentage, the better, and more likely are the lenders to approve a loan request.
If your debt to income ratio is too high, you have multiple options to consider, like increasing your income by taking on a second job, or decreasing your expenses where it’s possible.
- Your credit application has been rejected.
When you apply for a loan, your lender will check your credit report before they make a final decision about approving your application. If you thought you wouldn’t have any issues getting the loan, but you’ve been turned down, you may want to check your credit report. In fact, you probably should have checked your credit before applying for the loan.
Lenders usually don’t like risky candidates because they’re less likely to pay off the debt. That’s why they would rather approve a secured loan for you, but they may refuse to do that if your credit is so poor, or if you already have too much debt on your plate.
Remember that these rejections affect your credit score further, so you may want to wait until you improve your credit and then apply for a new loan.
- Debt collectors have started calling you.
If other signs weren’t alarming enough, this one is the definite wake up call. Receiving a call from a debt collector means your debt is already way over the line. On top of that, talking to them over the phone is potentially dangerous if you’re not careful.
The best advice is to continue the communication with them via mail. Contact your lawyer and explain the situation to them – having professional help will probably be necessary to get you out of the debt in a safe manner. They can give you valuable advice and help you make a plan of returning everything you owe so you can start fresh with your finances.
Plan Your Budget in Advance and Create an Improvement Strategy
What is done is done and you can’t change the past. But you can plan better for the future! Learn from your mistakes and create a plan aimed at improving your bad credit as soon as possible. Taking action right away could keep you from losing sleep over your financial troubles.
Increasing your income and cutting down your expenses can help, but it’s not enough. Learning how to prioritize and become disciplined is crucial, as well as noticing the first signs of struggle.
There’s a lot you can do to prevent bad credit before you’re in a situation where you have to work on improving it.
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