It seems that cash is no longer king. With so many people relying on credit to make purchases these days, especially with the popularity of online shopping, we’ve definitely moved into an era where the convenience of credit reigns supreme. Unlike cash-in-hand, however, it’s all too easy to overextend ourselves when spending on credit alone.
You might wonder how people end up with bad credit, and the answer is: often without noticing. Most of us don’t have the cash to make large purchases like houses or cars, or even attend college. Instead, we take out loans to cover these major expenses so we can pay them back over time, albeit with added interest.
Then there is the problem of credit cards. Too many of us treat them like money in the bank, when in fact, each transaction is like a mini loan, complete with interest payments. When you start to rack up debt, it can become extremely difficult to dig yourself out, especially with compound interest, and if you start paying late or missing payments, you could end up with black marks on your credit report that cause your credit score to plummet.
Poor credit need not be a lifelong sentence, though. There are several ways to reduce debt, improve your credit score, and become the low-risk candidate lenders prefer. How can you go from bad credit to good credit? What role do credit cards, personal loans, and other factors play? Here’s what you need to know to get on the right path with your credit.
What Qualifies as a Poor Credit Score?
Credit scores typically range from about 300 to 850, although you rarely see the extremes of very poor credit on the low end or exceptional credit on the high end. It takes an overwhelming combination of factors to get you to either end point.
Most people fall somewhere in the middle range, with fair credit (580-669), good credit (670-739), or very good credit (740-799). Even so, there is a lot of variation in these ranges, and if you don’t pay attention, you could end up on the lower end with no clear notion of how you got there, or how to claw your way back.
What Does it Mean?
A bad credit score doesn’t mean you’re a bad person. In many cases, people end up with poor credit because no one ever taught them how to manage credit wisely, because of circumstances beyond their control (accidents, illness, job loss, etc.), or through some combination of the two.
What it does mean is that you may have trouble gaining approval from lenders, or you may be penalized with less than favorable terms for lending, including higher interest rates than people with top credit tiers pay. The important thing to understand is that you can dramatically improve your credit score by checking your credit report regularly, working to reduce debt, and even getting an installment loan, among other things.
Checking your Credit Score Regularly
The place to start if you want to improve your credit score is by checking on it regularly. This means keeping track of your credit report, which you can view online for free. Many people labor under the misapprehension that checking your credit report frequently will lower your score. This is not the case.
When creditors make inquiries about you, it could start to impact your score in a very minor way, but checking your own report is different, so don’t be afraid to do it. This not only helps you to understand the activities that are lowering your credit so you can begin to correct them, but it also provides the opportunity to catch instances of fraud, such as identity theft, so you can nip them in the bud before they cause further harm.
As a bonus, checking your credit report regularly as you work to improve your score can help to motivate you to keep going. Seeing improvements is a great morale booster when you feel that itch to pull out old credit cards and make unnecessary purchases.
Overwhelming debt is often a major contributor to bad credit, for a couple of reasons. First, you want to maintain a good debt-to-credit ratio. The debt you carry could account for about 30% of your FICO score, and a good rule of thumb is to never spend more than about a third of the credit available to you via credit card. So, if you have $9,000 of available credit, for example, try to keep your balance at or below $3,000.
This, of course, isn’t the only thing affecting your credit score. Your credit history also accounts for about 35% of your score, the length of your history is another 15%, the number and type of debts you hold is 10%, and the final 10% revolves around new credit accounts.
Generally speaking, the less money you owe, the better your score is likely to be, but you also need to make payments on time and not miss any payments. In addition, you’re better off keeping old cards with a long history of good behavior, or if you upgrade, switch to cards with better terms (lower interest, rewards, etc.) that you plan to keep for an extended amount of time.
The Power of a Personal Loan to Improve Credit
Reducing debt isn’t easy, but one options to consider is taking out a bad credit loan that can not only help to reduce overall debt, but also improve your credit score along the way. How does it work?
If you have several credit card accounts for which you’re paying exorbitant interest, you may be struggling to pay down debt. When you take out a personal loan, you could pay off credit cards in full, consolidating all of your debt to a lower interest rate (and lower monthly payments). Then you can cut up all but your lowest interest rate credit card to reduce the temptation to spend.
From there, you simply have to make personal loan or payday loan payments on time in order to improve your credit rating and start to build a solid credit history. With reduced payments, you may even be able to pay more toward the principle each month, eliminating debt even faster. With just a few targeted strategies, you can turn your credit woes around and go from bad to good credit faster than you imagined.