Improve a Low Credit Score To Prevent Financial Doom

Banks Editorial Team · December 5, 2018

Do you need to improve a low credit score to increase your financial freedom? Even though you currently have a low credit score, it does not mean that you are financially doomed forever. If the appropriate strategies are put in place one can improve their credit score and return to financial stability. A low credit score will affect the possibility of starting a business, acquiring a loan and making large purchases such as buying a house. Start by finding out what your current credit score is:

 

How to Improve a Low Credit Score

There are several components of the credit score that indicate a low credit score. These components include payment history, amounts owed or credit utilization, length of Credit History, types of Credit and new credit. Improvement in these areas will help improve a low credit score over time.

A payment history is an indication for lenders and creditors whether an individual is a lending risk due to a history of late or missed payments. This includes credit cards, retail accounts, installment loans such as school loans, finance company accounts and mortgages. They also include public records such as bankruptcy. A history of prompt payment will improve a low credit score. The total amount of money one owes will show how deep into debt they are and will affect their credit score. Paying debts such as installment payments on time will be viewed favorably even when there is still an outstanding amount to be paid. High balances or nearly maxed out credit cards will negatively affect credit scores. Settling these balances and keeping credit balances low will greatly improve an individual’s credit.

How Time Can Improve a Low Credit Score

The amount of time you have had and used credit will affect the credit score. A history of irresponsible credit management will negatively affect the credit score. Making timely debt payment shows lenders a favorable repayment pattern. The number of times you apply for new credit suggests you are about to take on more debt. Opening many credit accounts in a short period of time is risky if you do not have an established credit record. Each time you apply for a new line of credit, that application counts as an inquiry or a “hard” hit. View your credit report to see what inquiries are on your credit history:

 

Paying credit card bills and other debts such as mortgages and loans on time shows a history of good credit management. keeping balances on credit cards and retail accounts can also improve a low credit score. It is important not to exceed 30% of the credit on credit cards.

How Low Credit Impacts Your Finances

Having a low credit score means one might be a financial risk hence it comes with many disadvantages. The credit score directly affects the chances of securing approval for a new loan or credit application. Most lenders will avoid giving credit to people with low credit scores due risk of repayment. People with low credit scores will also have a higher rate of interest on loan repayments. Low credit scores also attract higher insurance premiums. Timely payment history and outstanding debt levels are particularly important to insurers. Many employers seek applicants with a strong credit score because it shows responsible financial abilities. Getting employment will be more challenging particularly if you’ve got huge outstanding debts or even a history of bankruptcy. This is especially true for the upper management positions. Starting a new business might also prove to be more challenging, as most businesses require business assistance such as loans. Even landlords check credit score and are less likely to accept a tenant with a low credit score. Landlords make the assumption that those with a bad credit are more likely to be delinquent on monthly payments, which puts them at a greater financial risk.

According to consumer credit reporting agency Equifax, negative information can stay on your credit report for approximately seven years, depending on how bad your credit score is and what type of unpaid debts are on your credit report. Most lenders and creditors will check the entire credit history but mainly focus on recent activity.

A bad credit score will make access to financial services difficult for an individual but it does not permanently doom their financial future. Better credit management as such timely bill payments can improve credit score.

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