Many people have gone through a financial hardship at some point in their lives. The world we live in is constantly changing, and jobs can sometimes be unstable. Our careers may not always go the way we planned, natural disasters happen, and there are many other situations we have no control over.
No matter how good you are at budgeting or how careful you are with your finances, unexpected expenses can force you into debt or into emptying your savings account. If your struggles continue, your debt could become difficult to pay off, especially if your income is low or non-existent. This affects your other future financial decisions, your everyday budgeting, as well as your credit score.
Multiple factors, such as being late with payments, can have a negative influence on your credit score. You may perceive this situation as extremely stressful, but you should know that there are multiple ways for you to improve your score and take your finances into your own hands again.
What Is a Credit Score?
Simply put, your credit score is a number that expresses your creditworthiness, and it’s based on a credit report that your lender gets from a credit bureau. It’s how lenders assess their potential clients and decide whether to lend money.
Most lenders typically use the FICO score (Fair Isaac Corporation), which usually places your credit score between 300–850.
How is this score calculated? The bureaus take multiple factors into account:
- New credit inquiries (10%)
- Types of credit you’ve used (10%)
- How long you’ve had the credit (15%)
- The overall amount of debt (30%)
- Your payment history (35%)
It’s not always easy to say whether a credit score is good. If yours is above 750, for example, you can rest assured that it’s great and that your loan will likely be approved. And not only that, your bank will probably offer you better rates. If it’s lower than 700, it doesn’t mean that your lender will decline your application. As you represent a higher risk for them, you won’t be able to get the best conditions and rates, but your request may still be approved.
If you don’t know what your credit score is and you’d like to check it, you can request your credit report once a year from some of the main credit bureaus. If you’ve already used it in the current year, you can ask for it again if you’ve been laid off in the past two months or if you’ve noticed a mistake on your previous report. In this case, you have 30 days to request a dispute and make it right.
Note that requesting to see your credit report is also an inquiry, but it’s considered a “soft inquiry,” so it doesn’t affect your credit score. You can even track your credit score with free or paid apps. The paid option gives you a deeper insight into your credit report while the free service lets you check your credit score and limits your access to the report.
What is a Bad Credit Score?
We mentioned good and excellent credit scores that will help you get a loan, but what about bad credit scores? What’s considered bad and how bad is it? Here’s the scale:
- 300–629: Bad credit score. If you belong to this group, you may find very few lenders who will consider you trustworthy. If they give you any offers at all, they probably won’t be very tempting.
- 630–689: Fair credit score. This is slightly better, but you still won’t have access to the best offers and the maximum number of credit cards.
- 690–719: Good credit score. The benefits you’ll experience with this credit score are lower interest rates and more options.
- 720–850: Excellent credit score. You qualify as a trustworthy client, so you get the best offers, the lowest interest rates, and many credit cards to choose from.
What negatively affects a credit score?
Simple acts can lower your credit score dramatically. Here are two examples of how this happens:
- What if you close an account?
When you close an account, you have fewer open ones, and the overall amount of credit you have available is also smaller. The direct consequence of this is a higher utilization rate. This is also called a balance-to-limit ratio, which represents the amount of credit you use compared to the total amount of credit available. To sum it up, by closing an account, you make your balance-to-limit ratio higher when it’s supposed to be as low as possible.
- What if you’re late with a payment?
Not only do you have to pay additional fees and interest when you fail to make a payment by the due date, but it also reflects poorly on your credit score. Did you know that one payment you miss may keep appearing on your credit score over the next seven years? Bankruptcy is similar, but that can remain on your report even longer.
If you don’t know what your credit score is and you’d like to check it, you can request your credit report once a year from some of the main credit bureaus.
Tips for Improving Your Credit Score
Check your credit reports
Sometimes, credit reports have mistakes, so make sure you double-check yours before you accept that you have a bad credit score. Maybe some information isn’t accurate, or something is missing from the report. Don’t think that disputing an error isn’t worth it. Contact your credit bureau and your lender as soon as you can and notify them of the existing error. This won’t affect your credit score in any way, other than improving it if they remove the error.
Pay down your credit cards as often as possible
Reducing the total amount of money you owe is always a good idea and may prove to be extremely effective. If you pay down smaller amounts more often, it will be easier than having to pay down a large amount that you don’t have. Avoid closing credit cards you don’t use to improve your credit score because that only works for a short while. Also, opening new credit cards to improve the balance-to-limit ratio may, in fact, cause your credit score to decrease.
Leave old debts on the report
While it may seem to make more sense to remove all past debts, it might not in this case. If you have a past debt that you paid off on time, without any missed or late payments, no need to take it off your credit report. It may actually help your credit score and affect it positively. A history of such debts is evidence of your responsible behavior, so it makes you a creditworthy client in the eyes of your lender.
Don’t rush into anything
Opening new accounts or applying for new loans too soon may do just the opposite of what you wanted. If you open many new accounts because you want to improve your score, it will actually become lower because your average account life will become shorter. Also, try to avoid applying for new credit until your credit score is good (or excellent) again. You shouldn’t allow “hard inquiries” too often during the two-year period because it will negatively affect your credit score.
Pay your bills on time
Your payment history is the biggest part of your credit score (35%), so make sure you pay all your bills on time. Any missed or late payments will show on your report and in your score. Remember, this isn’t something you can fix; it’s in the past and it’s done. If you don’t have financial problems, but you’re quite forgetful, don’t let it ruin your credit score when there’s a possibility of making payments automatically or setting reminders when it’s time to visit the bank. Even if you do miss a payment, try not to let it happen again, and this late payment will eventually stop appearing on your credit report.
Learn how to budget
This skill won’t only help you with improving your credit score, but you’ll also see it’s quite useful in the long run. Know how to handle your money and you’ll prevent yourself from getting into the “bad credit score” part of the scale again. Budgeting will help you become organized and manage your monthly income, so you don’t have to make ends meet at the end of each month. You may even be able to put some money aside, or into your savings account.
Change your habits
Maybe you haven’t been able to resist all those tempting discounts and you’re already famous among your friends for being an impulsive buyer. Building a good credit score almost from scratch will require that you give up many unnecessary things you thought you could afford. Changing your spending habits and being disciplined may be crucial for your process of improving your credit score. This is not a one-time improvement plan; changing your lifestyle and way of thinking will probably save you from this kind of stress in the future.
Track your progress
Be patient and try to stay on track. Write everything down, and even try to keep a financial journal, which will make it easier to track all of your loans, credit cards, scores, etc. Having everything in one place and creating a schedule for your payments will help you avoid missing any deadlines or making mistakes that’ll affect your credit score.
There’s Always Hope
Even if your credit score isn’t as good as you’d like it to be, don’t stress about it.
It’s true that you probably won’t get the best deals, but don’t let it stop you from trying. If you’re struggling to come out of a difficult period, your lender may take it into account. Especially if you’re taking all the necessary steps to improve your credit score as much as possible.
In fact, many lenders today try to see the entire picture before making the final decision. If other factors make you a creditworthy person, your loan may still be approved.