Bad credit history? Here's how to recover.
In an ideal world, everyone could afford to pay cash for all items. Until that day arrives, establishing and maintaining good credit is important, because often we need credit to purchase high-priced items such as houses, cars and furniture.
Maybe you had some tough times in the past and now you鈥檙e paying the price for a聽聽history. The good news聽is that there are things you can do to rebuild your credit, even if you can鈥檛 get a loan or conventional credit card.
How a credit score works
Credit scores are聽three-digit numbers, typically ranging from 300 to 850, that creditors use to rate聽your creditworthiness. Scores are聽based on how responsibly you鈥檝e paid off loans in the past. The higher your score, the more likely you will obtain a loan with good terms, because you鈥檝e proven there鈥檚 less risk that you will default.
There are three major credit scoring bureaus: Equifax, TransUnion and Experian. Each agency uses different algorithms to calculate credit scores, so聽each bureau鈥檚 score may differ.
How to聽repair your credit
One good option is to get a secured credit card, which requires that you make a refundable deposit into an account as collateral. Usually your credit limit will be identical to how much you deposited. Although this is not ideal, it does allow you to open a credit account despite a poor credit history and, more importantly, rebuild your credit.
Ideally you would pay the full balance off each month, though that鈥檚 not required. You must do聽two things if you want to rebuild your credit, though: Remit the required payment on time each month, and maintain a balance of no more than 30% of your credit limit. This balance-to-limit ratio is known as the utilization rate.
To illustrate the utilization rate, let鈥檚 say you have a secured credit card with a limit of $1,000, because you have deposited $1,000 into the account. To keep the utilization rate below 30%, your balance should not exceed $300.
As you repeatedly pay the bill on time and keep your utilization rate under 30%, your credit rating should increase. Many lenders will report your account activity to the credit bureaus, which can increase your credit score. Before you apply for a secured card, check if the issuer reports to the bureaus.
The effects of bad credit
Not only can a subpar credit score affect your ability to get聽聽and car loans, or get good terms on those loans, it can also affect other areas of your life:
Insurance:聽Insurance companies routinely check credit reports in order to determine premiums for home and聽. These premiums may be higher because of your payment history.
Employment:聽Many employers perform a credit check as part of the hiring process. It鈥檚 a controversial practice, but advocates say these credit checks are an important indicator of maturity, discipline and trustworthiness.
Housing:聽A low score can influence a landlord鈥檚 decision during the application process. Your credit report shows your monthly debts, and landlords review the report to see whether you could afford to pay聽rent. A bad credit score may not automatically exclude you from becoming a tenant, but delinquencies or accounts in collections may influence the decision. And if you owe money to another landlord, your chances of leasing the property are slim.
The road back to good credit may seem long, and you certainly won鈥檛 complete it overnight, but by taking some solid steps you will begin to find your way.
, AFC, is a financial educator and coach at聽.听Learn more about Roslyn on NerdWallet鈥檚聽
The article聽聽originally appeared on聽.
