The Enigma of Bad Credit Explained
Do you have a low credit score? If so, you’re not alone. Thousands of Americans, buffeted by the recession, are facing lower than average FICO scores. Since most Americans have, on average, a credit history of 14 years and 13 credit obligations, the capacity for error can be great. In fact, since the average American has approximately $19,000 in credit to manage, it helps to know how you can avoid getting lower credit scores, or how to improve your existing one. In this article, we discuss how bad credit happens and what steps you can take to repair your low credit score.
How Bad Credit Happens
More than 25% of Americans have credit scores below 600, which is commonly referred to as the dividing line between good credit and bad credit loans. How do they get into this predicament?
There are four steps that most consumers take on the road to poor credit:
Overuse of credit – the higher your balance, especially relative to your credit limit, the lower your credit score will be.
Late payments – a single late payment (over 30 days late), can dock your credit score by as much as 110 points.
Debt management tactics – short sales, deeds in lieu of foreclosure, settlements, and other debt reduction practices can decrease your credit score by as much as 85 to 160 points. Bankruptcy can drop your score another 130 to 245 points.
Actions by the credit card issuer – your credit scores will fall if your lender cuts your credit limit or pursues any collection activity.
Understanding Credit Management
It’s important to know that there’s a right way and a wrong way to manage credit. Less than 50% of Americans have ever been 30 days late on a payment, but 30% have been 60 or more days late, and 20% have had an account closed by the creditor. So obviously proper credit management practices should be implemented by at least half of all consumers who are using credit.
Credit utilization in the United States breaks down in this way:
40% of credit holders carry less than $1000 balance on their accounts;
48% carry approximately $5,000 or less as a balance;
37% carry less than $10,000 in non-mortgage related debt;
15% carry more than $10,000 in debt.
Repairing Credit – What You Should Know
You can repair your credit score by taking the following actions:
- Pay all your credit card and other bills every month;
- Begin paying down your high credit card balances;
- Exhaust all other avenues before allowing foreclosure to happen or declaring bankruptcy.
You should know that repeatedly requesting your credit report can lower your score. Be sure to challenge any false or incorrect information on your credit history, which you can obtain by getting your free credit report on an annual basis. The total amount of credit you have isn’t really what counts; instead, lenders look at your available credit when calculating your score. If you want to repair your credit, a debit card won’t help your score, but it can help to rein in your spending habits.
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