When my wife and I wanted to buy a house, we didn't have the money to pay for it in full. As a matter of fact, we didn't even have half of the house's value. Thankfully, what we lacked in cash, we made up for in credit.
Our lender accessed our financial history and quickly identified patterns of responsible financial behavior. As a result, the bank loaned us more than $100,000 to purchase our first home. A few months earlier, the story would’ve been less than triumphant. (More on that later.)
Credit has become a huge part of both corporate and personal finance. Ignoring its importance is like refusing to exchange currency to trade in a foreign land. If you want to buy and sell freely, having the right currency is a must.
But how does one go about fixing bad credit? Or building it, if it's nonexistent? This question is best answered when you understand the repercussions of bad credit. Let's briefly explore some ways bad credit history can cost you and derail you from your goals.
How Bad Credit Can Cost You
Inflated interest rates and fees
Most people know that bad credit can force them to pay more in interest. Poor credit leaves you little choice, exposing you to higher than normal interest rates and additional fees. How much exactly?
According to some experts, a 30-year-old with bad credit is likely to pay a quarter-million dollars more in interest over her lifetime than another individual with excellent credit. Obviously, these figures are relative to how much you actually borrow in your lifetime, but even having $30,000 in savings can boost your retirement account significantly.
For most of us, borrowing at some point in life (for a house, business, or personal use) is inevitable. But even if you don't, you still need credit for other things. For instance, a friend of mine was denied propane (for a house) because of his credit history. No, his credit wasn't bad -- it was nonexistent.
That dream job
It’s likely that a potential employer will check your credit history (unless you live in one of the few states that bans employers from doing so). Why? Just like lenders, they're looking to reduce risk. And rightly so, considering finances reveals a great deal about a person.
When your credit portrays you differently than your resume (trustworthy, responsible, and other nice adjectives), there is a problem. It can put you in a spot where you have to settle for a lesser position. Or worse, lose your current position. Your credit history could disqualify you due to traces of criminal behavior, actions that violate ethical standards, or simple irresponsibility.
What does your credit score have to do with insurance?
Insurance companies see your credit records as a reflection of your decision making. If your financial decisions reflect carelessness, the perception is that you're irresponsible in other areas of life -- driving, health choices, maintaining your house, and so on.
Limited access to credit
Having bad credit stifles both your buying and borrowing power. More often than not, lenders will see you as a risk and reject your application.
"At around 580, it becomes very hard to get access to any credit," said Greg Lull, Head of Consumer Insights at Credit Karma. "At around 550, you can only borrow money from people you don't really want to."
And if those numbers continue to dip, you might not be able to open a bank account or you could be forced to close the one you do have.
So, what does your credit look like? Are you in danger of running into any of the obstacles above? The good news is: IT CAN BE FIXED.
Fundamental Steps to Repair Bad Credit
My credit hasn't always been good. In fact, less than 2 years before I was approved for my mortgage loan, I was turned down for a $8,000 personal loan. It was THAT bad.
But if I can do it, so can you. Consider these simple steps to build, repair, and maintain your credit:
1. Check your credit.
The first step is to identify the problem. Know what you're working with to get a better grasp of what you need to do. I recommend Credit Karma (it's free and you can check anytime without hurting your credit score). You're also eligible for one free credit report a year from each of the three major credit reporting agencies at AnnualCreditReport.com
2. Get your balance up to date.
Making timely payments contributes greatly in factoring your credit score. MyFico.com says, “establishing or reestablishing a good track record of making payments on time will raise your score.” If you're behind on credit card or other loan payments, get your balance up to date by using automatic payment and or setting reminders so you don't forget. If you're struggling to make payments because of low income, it's always best to call your lender to work things out.
3. Lower your balance.
Once you're up to date and maintaining timely payments, shift your focus to lowering your balance. Why? Credit utilization, or the amount of debt you owe, is ranked second in importance in determining your credit score. The lower your debt amount to available credit, the better. With credit cards, 10% utilization or under is considered excellent.
4. Keep older accounts open.
It's important to keep your oldest account(s) open because the length of your credit history is worth about 15% of your overall credit score.
5. Lend to yourself.
If you have bad credit, your options are limited. But what if you can lend to yourself, improve your credit, and get that money back in one year? Clever, huh?
For those wanting to build credit or repair bad credit but have a small chance of getting approved, a credit builder account, a service offered by Self Lender, can help. In my opinion, it's not only the most responsible way to repair your credit, it’s also the easiest way to build your credit… while you save. And did I mention your money is insured?
Bad credit is a nightmare that can hold you back from some of your important needs and desires. Ignore it and it will ruin you worse than that middle school bully. Stand up to it today and dictate your financial journey. If not, it'll take more than your lunch money. It'll rob you of thousands of dollars.
By Francis John, author of My Bread Money