Credit Comeback: What it Means to Have Bad Credit (and How to Remedy It)

How to Fix Your Credit | Citadel

As you grow older and start facing life’s major milestones, credit is an essential part of life. It refers to a person’s ability to borrow, and determines the amount of money that can be borrowed. When you seek out a loan—be it a credit card, auto loan, or home loan—your credit reflects your reputation as a borrower, and helps to inform lenders whether or not you are a suitable and reliable candidate for a loan. As such, keeping your credit healthy is a critical endeavor.

People with a “bad” credit score likely failed to repay their credit and other obligations on time or at all. Although having bad credit is detrimental to your financial health, it doesn’t have to be permanent! If you have bad credit, you can work hard to make a credit comeback with the right knowledge and financial discipline.

What is “bad” credit?

Having bad credit means that lenders have assessed you to have a significant chance of defaulting on any loans. Hence, they are less inclined to lend you money or approve a credit card application. Moreover, bad credit could lead to higher insurance rates, difficulty renting an apartment, or even issues when applying for jobs.

The most straightforward way that lenders assess your reliability is via your credit score, and the most common credit score is the FICO score. Five broad factors go into determining your credit score, with each factor allotted a contributing percentage of your final score:

  1. Payment history: 35%
  2. Amounts owed : 30%
  3. Length of credit history: 15%
  4. Credit mix: 10%
  5. New credit: 10%

The final score ranges from 300 to 850. Generally speaking, anything above 670 is considered good, between 669 and 580 fair, while anything below 580 is considered bad.

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How to Fix Your Credit | Citadel

4 Steps You Can Take To Fix a Bad Credit Score

There is no one best way to instantly improve your bad credit score. However, there are concrete steps that you can take that, over time, will have a positive effect on it.

Step 1: Catch Up on Your Payments

Payment history and amounts owed are the largest components of your credit score. Delinquent or past due accounts will weigh down your credit score and you should start implementing a plan to get them current.

Of course, this is easier said than done. In addition to budgeting and saving, explore lower interest debt to pay off higher interest debt. For instance, using a personal loan to pay off credit card debt can save you money on the interest payments. Further, replacing revolving credit debt with installment-based debt is a positive for your credit score.

Step 2: Get the Right Kind of New Credit

Part of improving your payment history is establishing a positive track record of payments. In the example above, paying off your personal loan on time would help create such a track record and improve your credit score. However, try to keep the number of new credit applications you submit as low as possible, as research has shown that opening several credit accounts in a short period of time represents a greater risk

Some borrowers with bad credit might not be able to obtain such loans, leaving credit cards as the only option to rebuild their payment history. In those cases, we recommend choosing low-interest credit cards. Be diligent about paying them off, and aim to keep any credit card balances well below the credit limit.

Step 3: Build Better Financial Habits

The fact is that good credit can only be maintained through responsible financial habits. If you are trying to fix your bad credit, consider the habits that led you there in the first place. Do you spend your savings instead of using it to pay off debt? Do you keep your credit card in your wallet, accessible for everyday use, instead of big emergencies?

One thing we recommend is creating a budget and sticking to it. Simple tools such as setting up online reminders for your various accounts can also go a long way in ensuring that you don’t fall behind on your payments again.

A “bad” credit score isn’t the end of the world and it doesn’t have to last forever. With diligence and commitment, it is possible to undo past credit mistakes and get yourself back in the green. If you would like more personalized advice on your financial situation, Citadel can help. Schedule your free financial planning consultation with us today.

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