Bad credit is a nightmare that haunts many Americans, usually at a time of already tragic circumstances, i.e. job loss, illness, insurmountable debt from mounting medical bills, divorce, a death in the family, or myriad other tragedies cause a situation in which someone can’t pay their bills on time. In many polls, student loans and medical bills were the leading cause of bankruptcy, so it’s plausible to assume these are responsible for poor credit as well. The problem with poor credit is that it is very much like a grade point average when a college is considering someone for admittance; if the score is low, they are much less likely to be admitted, and if they are admitted, more stipulations may be placed on them, such as academic probation or more frequent appointments with their academic advisor, which may work well for some, but for others, it may make them anxious and compound the problem.
“Ninety percent of lenders use FICO. When my clients get their credit reports through a [free credit platform], they don’t use the same type of formula. They are angry when they learn that their 800 score that a [credit card company] quoted them is really only a 720 through myfico.com.”
One way to avoid this, of course, is to monitor myfico.com, but another way is to learn that strategic things that specifically contribute to a credit score. Of course, defaulting on loans – or paying them months late – is something that most people know will wreak havoc on credit. But by far one of the biggest credit lowering problems is debt-to-income ratio, as well as debt-to-credit ratio. When you have a credit card in which you have a $20,000 credit line, and have used $19,500 of that credit, it will take a hit on your credit score, even if you are paying the minimum (or more) amount on time.
Something else that surprises people is that having no credit cards, or never using credit cards, can hurt their score because it isn’t establishing credit at all.
Be aware, too, that while “bad marks” (late payments, loans that defaulted) may stay on your credit report for seven years, it’s also common to find them not removed when they should be. That’s why it is vital to monitor your report frequently for changes and errors. Some companies will agree to remove a poor reporting from your report if you ask that they do so (usually in writing). It’s never a bad idea to try to improve your rating, which ranges from the abysmal 300 to the perfect 850. The average rating, however, does vary from state to state; nationally, a score of 720 is a score that many consider great, but it is actually only average.
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