I am constantly surprised at how many among us don’t know or fully understand bad credit and how it can affect us all in our everyday lives. There are some who think that having and using credit is evil or dangerous and so they avoid it at all costs. In fact, there are people who have no credit rating at all who have never had a credit card or loan for anything in their life. Rare, but true, and those folks may wake up one day and find that was a really huge mistake.
When it comes to credit, one of the biggest mistakes you can make is to underestimate how much your credit rating may affect you and your lifestyle. In many areas, besides the amount of money you can borrow when you really need to, and the interest rate you will have to pay, mismanaging your credit can affect whether you can qualify for loans for a mortgage, car, or personal loan. Having no credit history means a lender just doesn’t know if you are a good risk and probably won’t lend you money or will charge you a higher interest rate and offer a lower amount if they do.
The Effects of Student Loans
One area that people totally underestimate is the matter of student loans and their repayment. Would you believe that student loan debt in the United States today is over $1.3 trillion? Student loans are treated just like any other installment loan and if you aren’t paying them off on time or worse, you're in default on a student loan, your credit rating will take a severe hit.
There is some good news here. If you are a younger person with little or no credit history, your credit rating and score can be established and actually will improve when you are paying off your student debt with on time payments. Whether you like it or not, your student loan debt may be the first account on your personal credit statement and it will affect you in some way.
How Your Bad Credit Can Make You Miserable
Be aware that having bad credit can affect your ability to gain employment, rent an apartment, or obtain life insurance. Overall, it can hurt your lifestyle in ways that you just aren’t prepared to deal with and can all be avoided if you establish and use your credit responsibly.
The three credit bureaus—Experian, Trans Union, and Equifax—all keep lifetime records of your credit or lack thereof and are regularly used by employers to see if you are the kind of employee that want to have. This is especially true in areas where security and money are involved like the military, law enforcement, accounting, and retailing. People with no credit or bad credit are thought to be tempted and more likely to be dishonest when around money and property because they haven’t shown good habits on their record. Fair or unfair, that’s the way it is treated.
Looking to lease an apartment? Landlords also use credit scores to screen their tenants. If you don't pay your creditors, you're less likely to pay your rent. What about insuring your car or truck? Yes, insurance companies use your credit score as one factor in determining your rates and lower scores mean higher premiums.
Credit Can Love You or Hate You, Which Would You Prefer?
Nearly 60% of Americans do not even know what their credit scores are. That’s a little bit like not knowing what the medicine you are taking each day is and does and just hoping for the best. Your financial health is described by your credit report and scores. You may not need your credit rating to get along today, but it will eventually be necessary if you are like the overwhelming majority of all Americans when it comes to buying or renting a home or car or seeking job opportunities.
You Don’t Have to Pay to Find Out About Your Credit
You can and should get your credit report and score and check it often. It costs nothing to do that since the passage of the Fair Act Credit Transactions Law in 2003 (FACT Act). You now can check your complete report at sites like Credit Karma or WalletHub as often as you like for free and it will never affect your ratings when you do.
Errors on Your Credit Report Can Hurt You
Like everything in life, mistakes can happen and if you check your credit report you can find and be able to fix the errors fairly quickly. Errors like not crediting your payments properly, accounts that are not yours, or other problems can be challenged at the three bureaus online and they must respond to you within 30 days by law. You can also check with your creditor directly to fix any error. If you don’t check it, you can’t fix it.
5 Cardinal Rules That Insure Good Credit
It’s pretty straightforward, but for some reason credit is very misunderstood. Having a good credit rating and report depends on several factors. Here’s the skinny on what you need to do:
- Pay your bills on time, period. Even missing one payment can lower your credit score and cost you money in penalties and interest.
- Pay down your debts each month. Your credit scores are affected by the amount of debt and the percentage of utilization of your available credit. Using more than 30% of your available credit lowers your score.
- Don’t max out any one credit card account. Spreading your debt among two or three credit cards is better as it keeps your utilization amount lower per card rather that at 100%.
- Your rating improves when you have both a history of revolving credit (credit cards) and loans (mortgages and personal loans, for example) on your record.
- Don’t close accounts when you are done using them. Having a long history on your record is good to have and keeping the available credit included in your utilization calculations helps your rating.
Credit is important and it should never be abused. I rarely carry a balance on any of my cards by paying them in full every month and that’s one of the main reasons that my FICO rating (my credit score) is always in the excellent category. That’s important to me.
Bad Credit Isn't a Lifelong Sentence
The good news is that you can recover from bad credit, but it takes time and a change of your behaviors to do it. Credit can come to your aid and make things easier in life for sure, but it also opens the door to free and careless spending. Don’t let that happen to you!
How is your credit rating these days? Have you checked it lately? Have you even established credit as of yet? If you are married, do both of you have credit established? Do you use credit to your advantage or are you a non-believer?