CardRates.com Guide: Bad Credit
Trying to figure out why your credit rating isn’t as good as it could be? It may be caused by something you’re aware of, but it could also appear like a mystery. The factors that cause a bad credit rating are complex, but they’re not all that mysterious.
Here are seven factors that can cause a bad credit rating and what to do about them:
The single biggest factor that causes a bad credit rating is our past payment history. In fact, 35 percent of our credit score is based on our history of making payments on time. And it’s not just credit card payments that go into our credit report – it also factors in late payments for car loans, mortgage payments and even some utility bills.
A judgment of financial liability by the courts shows a lack of responsibility toward paying your debts. This can definitely impact your credit rating in a negative way. It’s possible for you to get a judgment against you without you ever appearing in court, so make sure this isn’t on your record.
If you’ve ever had a loan or credit card debt charged off by the creditor or had it sent to collection, this can stay on your credit report for up to seven years. However, be careful when dealing with this type of debt, as making a payment on it now could possibly restart the clock and keep it on your record even longer.
If your credit rating took a hit and you have no idea why, it may have to do with your credit utilization ratio. Each of your cards has a credit limit, and the amount you owe is a percentage of that limit. If your total debt exceeds around 35 percent of your total available credit, it can have a negative impact on your score. To fix this, either lower your debt or increase your available credit limit.
If you have too much debt, it might make sense to close a credit card and then pay off the balance. Avoid this line of reasoning. In fact, closing a credit card that has a balance will make it seem like you have exceeded your credit limit. It also has the effect of lowering your total available credit. Instead, pay off the balance and put the card in a drawer.
Believe it or not, applying for a bunch of new credit – cards, loans, etc. – can harm your credit rating. It’s sometimes seen as a red flag that you’re desperate for cash and need more credit to pay your bills. If you need to apply for a loan or a credit card, do so incrementally and wait at least 30 days between applications.
Sometimes the reason for a bad credit rating isn’t even your fault. The credit events that get reported to the rating agencies and make it on to your credit report can sometimes be in error. Or maybe the reporting agency mistakenly thinks you’re someone else because you share their same name or a similar address. It could also be due to fraud or identity theft. Check your credit report frequently and dispute any errors.
Fixing a bad credit rating is much easier when you know what’s causing the problem. Take time to understand how it works and you’ll have a much better chance of getting it resolved. Remember to be patient when working to fix a bad credit rating. It probably won’t happen overnight.
Photo source: torycapital.com
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