Smart Ways to Overcome Bad Credit - What Is Bad Credit?

Is bad credit keeping you awake at night? Unable to get loans or credit because your credit score is low?

56% of the population has problems with their credit score. Due to this, they cannot get the best mortgage rates. This is because the best interest rates for loans are reserved for those with a good or high credit score.

What Is Bad Credit?

You already know that the credit score range has specific benchmarks. The closer you are to the 900 mark, the better your chances to get the best credit will be. The further you are from the 900 range, you will get appropriately downgraded credit.

If your score is too low, lenders would not want to give you any loans at all for fear of inevitable loss. Bad credit is synonymous to a poor credit score. When you have so much debt that you are unable to pay back the loan on time repeatedly, it leads you to bad credit.

Bad credit considerably reduces the chances of your getting further loans even during emergencies, as it also adversely affects your creditworthiness.

The effect of bad credit on your credit score is a problem. With a bad credit record in your credit report, you won’t be able to get loans, especially during emergencies.

Even if you do get credit or loans, they would not have the best conditions or terms. Most likely, there will be a high APR (Annual Payment Rate), a high-interest rate, or a long-time payment plan.

However, all is not doom and gloom.The silver lining to the dark cloud of bad credit is that it can be improved with a few proven strategies.

Six Ways to Get Over Bad Credit

Here are six tips for improving your credit score and getting rid of bad credit. These are highly effective, and the only downside is that they take time to produce any results.

Check Your Credit Report

The very first thing you need to do is to check your credit report. This report has all the necessary data to calculate your credit score.

A mistake or miscalculation in the report will likewise affect your credit score. When you do get these reports, check for any errors. In particular, pay attention to payments and sums. These have a higher likelihood of showing errors.

In case you do find errors, let the concerned credit bureau know. Write a letter listing the mistakes, along with verified supporting documents as proof. Highlight the error to make it easier for them to follow up on it.
Set Automatic Payments or Payment Reminders

One of the most common, and very unfortunate, reasons for people missing monthly payments is that they forget to pay. To ensure that it does not happen to you, set payment reminders. Otherwise, talk to your bank’s representative to set monthly debit from your account.

Remember that late payments are penalized in the credit report by lowering your score. Hence, when you automate your payments, you remove a significant risk to your credit health.

Plan Your Finances

This step might not be easy or even possible from the very beginning. It needs to be done to salvage the situation.

Use credit cards as little as possible. Create a payment plan that facilitates paying off your credit cards with high interest first. At the same time, keep paying the minimum payments on the remaining credit card accounts.

Don’t Shut Down the Old Accounts

Is a bad payment history giving you nightmares? If so, you do not need to close down the old credit accounts.

First of all, doing so will not remove bad payment history.

Secondly, closing down your old accounts can make your credit history seem shorter and can negatively affect your credit score. Rather than removing old credit cards, you can use them the bare minimum needed to keep them active.

Keep Inquiries to a Minimum

While you can make an inquiry regarding a credit card at any time, too many inquiries can bring down your credit score by a significant amount.

Your credit score is affected because when you make an inquiry, as a potential creditor also makes a hard inquiry with the concerned credit report agency. Too many of such instances can be harmful to your credit score.

Be Responsible for Your Finances

Even if you follow all the steps above, you still may not be able to solve anything if you don’t become financially responsible. You can do this by using your credit card responsibly, differentiating needs from wants, and having a six-month emergency fund.

Effects Of Bad Credit Score - Side-Effects of Bad Credit

 There can be several reasons why you have a bad credit score:

• You have missed payments unintentionally because you forgot the payment due date.
• You have made payments late without knowing the impact of it on your credit score.
• You have generated too many hard inquiries against yourself by applying for multiple lines of credit at the same time.
  

But whatever be the reason, a bad credit score can cause you trouble in many circumstances. Wondering how? Let's dig a bit deeper into it.

Side-Effects of Bad Credit

You May Not Get Approval on Loan/Credit Card Applications

A credit score is one of the prominent parameters that banks consider while checking your loan or credit card application. Although other factors such as your income, employment status, and obligations (loans, cards) also matter; the credit score helps the banks in determining your creditworthiness. Thus, a bad credit score can lead to rejection of the application, since no lender would be willing to trust you.                            

You May End Up Paying a Huge Rate of Interest

Regardless of a bad credit score, it is likely that a few lenders will agree to give you a loan. Don't be too glad, however, as you may end up repaying a hefty amount for it.

Let's discuss this with an instance: You get a car loan of Rs.10,00,000 for 4 years at a fixed interest rate of 12%. When you repay it, you end up paying an interest amount of Rs.264,024 on Rs.10 lakhs.

Now imagine a situation where you have a good credit score. You have been approved for the same loan amount for the same duration, but this time at a fixed interest rate of 9%. In this case, the total interest amount that you have to pay will be Rs.194,482. Subtract Rs.194,482 from Rs.264,024 - the difference is Rs.69,542.

Is it worth to pay that much extra for the same loan amount? Ultimately, someway or the other, a low credit score leads to a loss for you.

You May Get a Loan, but on Unfavorable Terms

While there may be lenders who would still approve you for credit, beware of the terms, which may not be in your favor at all. Either you will get the loan on a higher rate of interest, or you will not be approved for the requested amount. Hence, these circumstances will put you under the pressure of either paying more or arranging the extra amount from other sources to serve your purpose.

Same is the case with credit cards. You may get approved for a secured card against a fixed deposit, but remember that secured credit cards generally have higher APR ranges than unsecured credit cards. This means that you will pay more interest while using them.

Starting Your Business Will Not be a Breeze

If you have aspirations of being an entrepreneur, it may either go in vain altogether or a hefty debt trap may put an end to your plans midway - all due to a bad credit score. Once again, the reason would be the same - that you won't get approval from banks for the funds to execute your plan.

In case you approach other financial institutions such as NBFCs, it may burn a hole in your pocket as they will take the risk of lending you money only at a really high rate of interest.

You May Face Emotional Distress Due to This Bottleneck

Let's think of some scenarios; where you decide to pursue higher education or you wish to buy a home. Essentially, these are your life goals. If you fall short of fulfilling them due to a bad credit score, will it not have an adverse effect on your emotions?

Also, don't forget that a bad credit score doesn't improve in a day; it takes 6-12 months of responsible behavior towards credit repayment. Building your credit score takes a great deal of discipline and self-restraint, very often leaving one feeling frustrated and helpless.

Effects Of Bad Credit Score - Reason for Bad Credit

 There can be several reasons why you have a bad credit score:

• You have missed payments unintentionally because you forgot the payment due date.
• You have made payments late without knowing the impact of it on your credit score.
• You have generated too many hard inquiries against yourself by applying for multiple lines of credit at the same time.
  

But whatever be the reason, a bad credit score can cause you trouble in many circumstances. Wondering how? Let's dig a bit deeper into it.

Side-Effects of Bad Credit

You May Not Get Approval on Loan/Credit Card Applications

A credit score is one of the prominent parameters that banks consider while checking your loan or credit card application. Although other factors such as your income, employment status, and obligations (loans, cards) also matter; the credit score helps the banks in determining your creditworthiness. Thus, a bad credit score can lead to rejection of the application, since no lender would be willing to trust you.                            

You May End Up Paying a Huge Rate of Interest

Regardless of a bad credit score, it is likely that a few lenders will agree to give you a loan. Don't be too glad, however, as you may end up repaying a hefty amount for it.

Let's discuss this with an instance: You get a car loan of Rs.10,00,000 for 4 years at a fixed interest rate of 12%. When you repay it, you end up paying an interest amount of Rs.264,024 on Rs.10 lakhs.

Now imagine a situation where you have a good credit score. You have been approved for the same loan amount for the same duration, but this time at a fixed interest rate of 9%. In this case, the total interest amount that you have to pay will be Rs.194,482. Subtract Rs.194,482 from Rs.264,024 - the difference is Rs.69,542.

Is it worth to pay that much extra for the same loan amount? Ultimately, someway or the other, a low credit score leads to a loss for you.

You May Get a Loan, but on Unfavorable Terms

While there may be lenders who would still approve you for credit, beware of the terms, which may not be in your favor at all. Either you will get the loan on a higher rate of interest, or you will not be approved for the requested amount. Hence, these circumstances will put you under the pressure of either paying more or arranging the extra amount from other sources to serve your purpose.

Same is the case with credit cards. You may get approved for a secured card against a fixed deposit, but remember that secured credit cards generally have higher APR ranges than unsecured credit cards. This means that you will pay more interest while using them.

Starting Your Business Will Not be a Breeze

If you have aspirations of being an entrepreneur, it may either go in vain altogether or a hefty debt trap may put an end to your plans midway - all due to a bad credit score. Once again, the reason would be the same - that you won't get approval from banks for the funds to execute your plan.

In case you approach other financial institutions such as NBFCs, it may burn a hole in your pocket as they will take the risk of lending you money only at a really high rate of interest.

You May Face Emotional Distress Due to This Bottleneck

Let's think of some scenarios; where you decide to pursue higher education or you wish to buy a home. Essentially, these are your life goals. If you fall short of fulfilling them due to a bad credit score, will it not have an adverse effect on your emotions?

Also, don't forget that a bad credit score doesn't improve in a day; it takes 6-12 months of responsible behavior towards credit repayment. Building your credit score takes a great deal of discipline and self-restraint, very often leaving one feeling frustrated and helpless.

Do-It-Yourself Credit Repair - How Does One Land in Bad Credit?

A credit score is a three-digit numeric that banks and other financial institutions consider determining the credit-worthiness of an individual.

On a numerical scale, a good credit score lies somewhere between the range of 700-800. On the other hand, if you have a credit score below 600, it’s high time that you ask yourself why you are within the ambit of poor credit.

How Does One Land in Bad Credit?

1. A large number of missed payments - You may have missed some credit card or EMI payments in the past, due to which your credit score has decreased.
2. High credit utilization rate - Credit utilization ratio = Credit card spending/credit card limit.
3. If you spend more than 30% of the credit utilization limit, it reflects that you are credit hungry, and this can be the reason for a slump in your credit score.
4. Multiple credit accounts - In case you have various credit cards and loan accounts, then it indicates that your debt to income ratio (DTI= Individual's monthly debt payments to monthly gross income) isn't maintained and you fulfill your obligations by borrowing money from several sources.
5. Errors in the credit report - A credit report is a detailed document that comprises a consolidated record of your finances, such as credit card bill payments, EMIs, etc. which the banks provide to the credit bureaus. Thus, if you haven't checked your credit report for a long time, there is a possibility that at least some errors have gone unchecked in your credit report.

What Happens When You Have Bad Credit?

Disapproval of loan/credit card applications

Based on the credit score, lenders decide whether to take the risk of providing you with a credit or not. Thus, if you have a poor credit score, there are higher chances of rejection from credit card issuers, banks, and NBFCs.

High interest rates

Even if some lenders approve you for credit, they would compensate for the risk by charging a high-interest rate, which could put you in a huge debt trap.

DIY Credit Repair Tips

Credit repair is a process through which one’s credit score can be improved. It can either be done on your own or with the help of an expert, be it a qualified individual or an organization.

However, remember that it's not a one-day process and will take at least 6-12 months to show improvement. Now, if you choose to DIY, the following are the tips that you need to consider:

Monitor your credit report

With the significance of a credit report explained above, it is evident that you have to make sure that you check your credit report regularly. If you are thinking about where to get this report from, mymoneykarma is the answer. Check your credit report for FREE through our intelligent finance tool.

Once you check the report, if you come to notice errors, rectify them immediately by reporting to the credit bureau or the lender, depending on the severity of the mistake.

Clear your missed payments

In case you missed a few payments because of non-receipt of statements or forgetting the due date, don't think that clearing them will go in vain. Maybe your credit score will slump in one quarter, but as you pay the due amount, it will show a rise in the next quarter. Also, be diligent in paying the rest of the bills or EMIs, as that will maintain the lender's trust in you.

Beware of a hard inquiry

A hard inquiry is generated when you apply for a new line of credit. Thus, until your credit score improves, it is advisable to not apply for a new one, be it a credit card or loan. Even if you have a good credit score, too many hard inquiries can definitely affect it.

Resolve a dispute with the bank or other lenders

If you have missed or delayed payments due to a dispute with the credit card issuer regarding APR (Annual Percentage Rate) or any hidden costs, then resolve it to save your credit report from further negative remarks.

Buy a secured credit card

A secured credit card is designed for people who are looking to build their credit score. It is issued against a security deposit that you have to make for gaining access to the offered credit card limit.

The activities on this card are reported to credit bureaus, and the credit score fluctuates accordingly. However, remember that you still have to pay your credit card bills on time for the card to be of any benefit.

Smart Ways to Overcome Bad Credit - What Is Bad Credit?

Is bad credit keeping you awake at night? Unable to get loans or credit because your credit score is low?

56% of the population has problems with their credit score. Due to this, they cannot get the best mortgage rates. This is because the best interest rates for loans are reserved for those with a good or high credit score.

What Is Bad Credit?

You already know that the credit score range has specific benchmarks. The closer you are to the 900 mark, the better your chances to get the best credit will be. The further you are from the 900 range, you will get appropriately downgraded credit.

If your score is too low, lenders would not want to give you any loans at all for fear of inevitable loss. Bad credit is synonymous to a poor credit score. When you have so much debt that you are unable to pay back the loan on time repeatedly, it leads you to bad credit.

Bad credit considerably reduces the chances of your getting further loans even during emergencies, as it also adversely affects your creditworthiness.

The effect of bad credit on your credit score is a problem. With a bad credit record in your credit report, you won’t be able to get loans, especially during emergencies.

Even if you do get credit or loans, they would not have the best conditions or terms. Most likely, there will be a high APR (Annual Payment Rate), a high-interest rate, or a long-time payment plan.

However, all is not doom and gloom.The silver lining to the dark cloud of bad credit is that it can be improved with a few proven strategies.

Six Ways to Get Over Bad Credit

Here are six tips for improving your credit score and getting rid of bad credit. These are highly effective, and the only downside is that they take time to produce any results.

Check Your Credit Report

The very first thing you need to do is to check your credit report. This report has all the necessary data to calculate your credit score.

A mistake or miscalculation in the report will likewise affect your credit score. When you do get these reports, check for any errors. In particular, pay attention to payments and sums. These have a higher likelihood of showing errors.

In case you do find errors, let the concerned credit bureau know. Write a letter listing the mistakes, along with verified supporting documents as proof. Highlight the error to make it easier for them to follow up on it.

Set Automatic Payments or Payment Reminders

One of the most common, and very unfortunate, reasons for people missing monthly payments is that they forget to pay. To ensure that it does not happen to you, set payment reminders. Otherwise, talk to your bank’s representative to set monthly debit from your account.

Remember that late payments are penalized in the credit report by lowering your score. Hence, when you automate your payments, you remove a significant risk to your credit health.

Plan Your Finances

This step might not be easy or even possible from the very beginning. It needs to be done to salvage the situation.

Use credit cards as little as possible. Create a payment plan that facilitates paying off your credit cards with high interest first. At the same time, keep paying the minimum payments on the remaining credit card accounts.

Don’t Shut Down the Old Accounts

Is a bad payment history giving you nightmares? If so, you do not need to close down the old credit accounts.

First of all, doing so will not remove bad payment history.

Secondly, closing down your old accounts can make your credit history seem shorter and can negatively affect your credit score. Rather than removing old credit cards, you can use them the bare minimum needed to keep them active.

Keep Inquiries to a Minimum

While you can make an inquiry regarding a credit card at any time, too many inquiries can bring down your credit score by a significant amount.

Your credit score is affected because when you make an inquiry, as a potential creditor also makes a hard inquiry with the concerned credit report agency. Too many of such instances can be harmful to your credit score.

Be Responsible for Your Finances

Even if you follow all the steps above, you still may not be able to solve anything if you don’t become financially responsible. You can do this by using your credit card responsibly, differentiating needs from wants, and having a six-month emergency fund.