Our credit reflects our financial situations. This situation is not something that is taught in schools. You could be an academic genius from an Ivy League school, but still, struggle to maintain your finances. It is not just about being educationally bright. It would help if you were financially smart as well. A lot of individuals find it challenging to maintain proper credits due to their spending habits.
Your credit score is a three-digit number that tells creditors and lenders how likely you are to repay your bills or the risk of not paying your credit card or credit card. One of the most often used credit scores ranges from 300 to 850, with higher credit scores. Although other types of credit scores may have different ranges, higher credit scores are always better than lower ones.
For those with limited finances, it gets more difficult to access various financial opportunities based on their credit information. Even when they do, these options come with higher interest rates. However, it is not too late to mend a bad credit score. In this article, we have provided everything you need to know about bad credit scores and how they can be changed.
Credit Score Categories
Remember that credit scores are not just grouped into two categories, good and bad. It is a spectrum with various grade sections. Your credit score falls within any of the five types used as a grading system.
- Excellent: 750 – 850
- Good: 700 – 849
- Fair: 650 – 699
- Poor: 600 – 649
- Bad: 300 – 600
This grading spectrum is currently used in most places. Although, they may change with time and from one credit company to another. What may be considered fair for one company may be deemed inadequate for another. It is essential to know the grading system of any credit company you are dealing with it.
What Makes Up Your Credit Score?
Five categories complete your credit score. When building your credit score, you need to improve each of these areas to get the best result: They are listed as follow:
- 10% New Credit
- 10% Credit Mix
- 15% Length of Credit History
- 30% Amounts owed
- 35% Payment History
● 10% New Credit
This section makes up part of your credit score because some individuals can apply for several credit cards simultaneously. Also, such people would pose a risk to banks and creditors as they either try to augment their insufficient income with credit cards or those that are new to credit cards.
● 10% Credit Mix
Your credit mix is created up of revolving credit such as credit cards and retail accounts, and installment credits like auto loans and mortgages. Ensure that your credit mix is balanced with the rest.
● 15% Length of Credit History
Having a rich credit history increases your chances of improving your credit score, depending on how good your account is. With FICO scores, you can determine when your account was activated, when last it was used, and your account average age.
● 30% Amounts Owed
This factor reflects the amount of debt that has been accumulated on your account. It helps you find out if you are maxed out on all your credit cards. Kindly note that you should not exceed 30% of your card balance. The amount of total debt you carry, the ratio of your credit cards to your credit line (also called credit utilization), and the ratio of your loans to the original credit sum.
As a guideline, you should keep your loan card usage at 30 percent or less, which means it only charges up to 30 percent of the available limit on any card.
Having a high balance or too much debt can significantly influence your credit score. The excellent news is that your loan score can improve as you pay off your balances.
● 35% Payment History
How often are you paying your debts? Are you always late on your payments? How many times have you missed payments? A lot of individuals flop in this area. Payment history makes 35 percent of your loan score. How much you pay your bills on time affects your credit score more than any other factor. Substantial payment issues, such as billing, billing, bankruptcy, reimbursement, tax exemption, or foreclosure, can ruin your credit score, making it nearly impossible to get approved for anything that requires good credit.
The best thing you can do for your credit score is to make payments on time.
Improving Your Credit Scores
It is not the end of the world if your credit score is in bad shape. You can work it out using these following steps:
- Sort out all late payments.
- Avoid closing your free accounts.
- Try to have your credit limit increased to boost your credit score.
- Settle the smallest debt and work your way up.
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What is a Good Credit Score?
Whether you have a good credit score depends on who checks your credit score and the criteria that measure you. In general, a good credit score is above 720, but for some creditors and lenders, the limit may be slightly lower or slightly higher. An excellent credit score tells lenders that you are likely to pay your bills on time based on how you spent your bills in the past. If you have paid your bills on time and have managed your credit well over the past few years, you are likely to have a good credit score.
Keep in mind that even with the high-grade credit, appropriate credit card and loan approval are not guaranteed as creditors and lenders consider other factors besides your credit score. We hope we helped you with this topic and that you find new information about bad credit scores.