Do you remember how old you were when you first learned about credit? For some people, parents instill in their children financial responsibility. For others, parents lack knowledge and never teach children about how to build it. There are also some people who understand credit but have bills that they were unable to satisfy while the accounts were in-house with the creditors. Debt is not always cut and dry, and bad credit happens even when you are credit conscious.
There is a stigma that people with bad credit are wasteful spenders or irresponsible debtors. The truth is that when people lack credit knowledge, the lesson comes after the damage occurs. This article helps explain why credit is important to you and ways you can work with credit repair companies to fix your history while gaining knowledge for future financial freedom.
What Is A Credit Rating?
A credit rating is used to grade your likelihood of repaying a debt. If you have recently applied at a car dealership, you may have noticed a letter between AAA and D. If you received a rating of AAA, you have the highest score possible. If you have a D rating, your grade will more than likely disqualify you for financing because your history shows unpaid balances.
Three primary businesses provide credit ratings: Moody’s Investors Service, S & P Global Ratings, and Fitch Ratings. These companies rate organizations and some individuals based on bond rating, market investment, and creditworthiness.
|AAA or Aaa: Extremely Strong Rating|
|Aa1, Aa2, Aa3, AA+, AA, or AA-: Very Strong Rating|
|A1, A2, A3, A+, A, A-: Strong Rating|
|Baa1, Baa2, Baa3, BBB+, BBB, BBB-: Adequate Rating|
|Ba1, Ba2, Ba3, BB+, BB, BB-: Less Vulnerable Rating|
|B1, B2, B3, B+, B, B-: More Vulnerable Rating|
|Caa, CCC: Currently Vulnerable|
|Ca, CC: Currently Highly Vulnerable|
|C: Currently Highly Vulnerable To Non-Payment|
|C, D: Failed To Pay Financial Obligations When Due|
|E, P, PR, Expected: Preliminary Rating Based On Pending Receipt|
|WR: Rating Withdrawn For Reasons Including Issuer Defaults, Debt Maturity, or Conversions. |
|Unsolicited: Rating By Agency And Not Issuer|
|·SD, RD: Obligor Defaulted Selectively But Will Still Meet Financial Obligations|
|NR: No Rating Request On File Or Insufficient Data To Base Rating On|
What Is A Credit Score?
Credit scores help lenders make investment decisions for individual borrowers. Fair Isaac Corporation (FICO) is the most popular system which produces credit scores that range from 300 to 850. The higher your score, the better your creditworthiness.
Three companies retain credit information: Experian, Equifax, and TransUnion. As companies do not report to every bureau, your score will fluctuate based on their algorithm calculations used by each organization. The credit bureaus recently started VantageScore which rivals FICO’s scoring system. Unlike FICO, VantageScore gives definitive reasons as to why you score as you do which will help when you need reliable credit repair information.
|741+: Excellent Credit Score|
|621 to 740: Good Credit Score|
|580 to 620: Ok Credit Score|
|300 to 579: Poor or No Credit Score|
How Will A Negative Credit History Hurt My Standing?
Your payment history is 35% of your credit score. A bad credit history will negatively affect your FICO score because the credit bureaus have adverse billing reports on file. When your score is low, it is an indicator that you are high-risk which will lead to a denial for a line of credit.
You may not even realize you have something on your credit until you apply for a loan, a mortgage, or a credit card. Also when approved with okay credit, you will receive a sub-prime loan with higher interest rates that lower the risk of your credit line. Even with a higher rate, it helps people who do not have credit establish and build a creditworthy history.
What Type Of Bills Can Hurt My Credit Score?
Failure to pay your monthly bills may or may not affect your credit score since many companies do not report to credit bureaus unless you leave unpaid balances after account closures. Here are a few billing issues that people often are unsure about. When you know which ones affect your score, it helps you budget based on the importance of payment schedules.
- Unpaid Rental Contracts and Utilities
Lots of people think that paying rent and utilities on time help their credit score. It turns out that it is not true. The credit bureaus receive notification only if you leave an unpaid bill. If you are worried about being a few days late on rent, utilities, cell phone bills, or insurance, do not worry as it will not hurt your score. What can affect you is the ability to receive future lines of credit which might cause you to pay a deposit if you repeatedly had late notices or utility disconnections. It might also hinder your ability to get future loans from a bank based on your loan payment history.
There is a misconception that late student loan payments affect your FICO score. As long as your status is not in default, it does not hurt you because the lender still considers you in good standing. Default, though, is a serious issue that affects graduates. According to Forbes, the 2017 default rate for student loans was 11.5%. You have 270 days to make a payment before it occurs and goes to a credit bureau. Once it changes to this status, it will affect your credit dramatically. Once in default, you will not qualify for student loans nor will other lenders feel comfortable with loaning money. If you are in default, you can contact your lender and pay as low as $50.00 a month to restore your good standing.
Americans spend about $3.4 trillion annually on health care with an average per person of $10,345. The data also found that by 2023, the average expense will be $14,944. If you experience a medical emergency and have multiple bills, your generally have an opportunity to work with the facilities to make monthly payments. When unpaid, the medical institutions have the right to sell your debt to collection agencies who then report to credit bureaus. This issue affects many people with proper credit, so credit bureaus have looked at ways to disallow medical billing from their algorithm for a standard grace period since the high cost of medicine is a significant factor to unpaid debt.
Anytime you have financing or a lease for an automobile, payments get reported to credit bureaus. Even if you are a few days late, you will experience a change in your credit score. Having no or bad credit will also affect your ability to get financing so you should always check your credit score before you submit your application. You can receive fast credit repair services from reputable credit repair companies who will assist you. That said, paying auto payments on-time is an ideal way to help build your credit if you lack it.
Merely having a credit card will positively affect your credit score because they are active, well-maintained accounts. Your credit issuer reports your activity monthly to credit bureaus which include account status, payment history, balance, and date of credit line opening. The number of cards, amount of payments, and credit limits also affect your score. If you do not have a credit card, it will hurt your score. If you do not have credit, charge cards help you establish your presence which will build your payment and history. Maintaining your account will increase your score and qualify you for credit increases.
Failure to pay your mortgage payments will reduce your credit score. It will also influence your score, so you should pay them on time. Your lender will track your payments monthly and report deficiencies that reduce your credit score. After four missed payments, you are subject to a foreclosure which will affect your credit long-term.
People worry about how bankruptcy affects credit scores as it will stay on your history for years. That said, most bills remain in your account for seven years, so both will impact your score negatively. There are two primary bankruptcies: Chapter 7 and 13.
- Chapter 7: As you will not repay any debt, a chapter seven bankruptcy will remain in your credit history for seven years. This type of report has a negative impact on your credit as it shows defaults, repossessions, and lender lawsuits.
- Chapter 13: It can take multiple years to repay debt, so this type of bankruptcy remains on your credit history for seven years. It is not a deal breaker, though, because a willingness to repay debt is better than a chapter seven’s nonpayment.
Will Poor Credit Affect My Mortgage Application?
Just because you do not have excellent credit does not mean you will not qualify for a mortgage. That said, you need to do your homework so that you know what will and will not affect you during the application process since no set score applies to all mortgage lenders.
|Jumbo Loans: 700 Score / Banking Loan (Some lenders require 650 with higher down payment)|
|HELOC: 680 / Home Equity Line Of Credit / Installment Loan |
|Cash Out Refinance: 640 Score / Turns Equity Into Cash / Refinances Home|
|USDA Mortgages: 640 Score / No Down Payment|
|203K Mortgages: 620 Score / Ideal For Homes That Need Repairs / Cash Back Option|
|HARP: 620 (If Credit Score Applicable) Home Affordable Refinance Program / Must be Fannie Mae or Freddie Mac Loans before 2009 to refinance mortgages with little to no equity.|
|Convention Mortgage Loans: 620 Credit Score / Private Lenders / Requires 5 to 20% down|
|FHA Mortgages: 580 and 3.5% Down Payment (500-579 / 10% down payment) Ideal for 1st time buyers.|
|FHA Streamline Refinance: No Credit Check / Refinancing of an FHA Home Loan / To qualify, you must have six months payments on file with 210 days passing after closing. |
|VA Streamline Refinance: No Credit Check (Great for veterans with no down payment)|
How Do I Improve A Low Credit Score?
You should have a pretty good idea of why credit is important to you, but you might still need information on how to improve a low credit score. Reliable credit repair is not difficult to achieve when you gather credit score information and design a plan to pay off your debts. In some situations, fast credit repair is possible if your history is not complicated.
For more in-depth issues like loan defaults or repossessions, it is advisable to work with experts at credit repair companies who know how to quickly contact lenders and set up payment plans after a critical analysis of your finances and billing obligations. Low credit also affects the economy, employment, and mobility which can further hurt your access to lines of credit.
Financial independence and spending habits promote a healthy economy. Consumer spending constitutes 70% of the economy’s gross domestic product (GDP) which is the market value of U.S. product and services. Inflation occurs when consumer debt liability is higher than the government’s assets which significantly affects the stock market and dollar value. When this happens, consumers save which causes the economy to slow.
- Business And Profession Licensing
When you owe a debt, you will not be able to secure a business license. Franchise lenders check your credit as a basis to approve or deny your application. You also will not get a professional state license which will significantly affect your economic stability.
Without credit, your mobility is limited because you must depend on cash or sellable assets during times of emergency. There are also products and services that require credit cards to secure access including hotel reservations, car rentals, and travel plans.
If you would like more information on credit management, repair, or personal finance tips, please visit https://yourpersonalfinancetips.com/. Not only will we give you the advice to restore your credit, but we also have reviews of the best credit repair companies to help you get started.