Almost 80 percent of Americans have some sort of debt, with the largest percentage going toward their mortgages.
If your mortgage is paid up and you’re still in debt, it means you’re likely paying interest or credit existing credit on your credit score. A bad credit score means you have a poor credit history, one bank won’t trust you to approve you for loans, mortgages, or credit cards.
How do you know if you have a bad credit score? And what are the main reasons behind a bad credit score?
For the answers, read on. We’re going to take you through the main causes of a bad credit score, as well as how you can improve your credit score.
Applying For Several Credit Cards Or Loans
An application for several different loans or credit cards can cause a low credit score due to the multiple applications appearing on your credit report. Each inquiry on your credit report detracts points from your credit score, especially if done within a short time period. Too many inquiries within a short period may be an indicator to creditors of potential financial distress and unreliable credit.
Additionally, if one of these accounts is opened with a large credit line, a high utilization ratio appears on your credit report. It indicates that you are relying heavily on credit and thus increasing the risk associated with lending to you. Too many accounts may raise red flags as you may be over-extending yourself financially.
To improve your score, strive to always make payments on time, reduce your debt and ensure you can keep up with your financial commitments. Apply for guaranteed loans now and get the funds you need to improve your credit score.
Late Payments
Late payments are one of the major causes of a bad credit score. When an individual does not make payments on time, it shows to the credit bureaus that the borrower can be unreliable and is more prone to being delinquent. Late payments also bring down the borrower’s credit score problems and make it difficult to obtain financing in the future.
It is usually reported to the credit bureaus after 30 days of the payment being due. Depending on the severity, it could stay on the credit report for up to seven years. In addition, the creditor may choose to send a collections agency to collect the debt which can further damage a person’s credit score. Late payments cause your credit score to drop and it may take a while to get it back to good standing.
Unpaid Debts
When a person has an unsettled debt, it can lead to unfavorable reports on their credit report and put a significant dent in their credit rating. Unpaid bills, whether medical, credit card, car loan, mortgage, or utility-related can all be reflected in building credit reports and will likely lower their credit score. The longer the debt remains outstanding, the worse it can get for their credit score.
It is important for people to make payment arrangements for their outstanding debts in order to prevent a drastic decrease in their credit score. It also helps to pay off old debts and keep track of their outstanding balances.
Bankruptcy
Bankruptcy is a major cause of a bad credit score. Even if bankruptcy is discharged, it can take up to ten years to recover from the damage it causes to a credit score. A bankruptcy can cause multiple and simultaneous hits to a person’s credit score.
This is because a bankruptcy filing is reported on every credit report, creditors may not provide updates on a discharged debt for several months. The debt itself will remain on a person’s credit report for up to seven years. Finally, some creditors may be less willing to work with individuals who have declared bankruptcy, and those who are willing may provide only unfavorable loan terms.
Ultimately, bankruptcy can remain a significant obstacle to repairing a person’s credit score for several years.
Borrowing Without Considering Affordability
This is when a person takes out a loan or credit card without considering whether they have the income to pay it back. When this happens, the person will often become unable to make the minimum payments their lenders demand, resulting in missed or late payments. This will then lead to late fees, penalties and additional interest charges, creating a snowball effect that can quickly damage a credit score.
Over time, the negative account history will continue to drag a credit score down until action is taken to reduce the amount owed and catch up on payments.
Not Paying At All
One of the major causes of a bad credit score is not paying at all.  If you are delinquent on payments, eventually the lender will turn your case over to a collections agency. They will report the debt to all 3 major credit reporting agencies, further harming your credit and decreasing it more. Finally, if any of the payments become so overdue, legal action may take place, occasionally resulting in legal fees and garnishment. All of these outcomes can severely damage your credit score, most often beyond repair.
So it is recommended to make all payments on time or contact the lender within a reasonable time frame to work out a payment plan.
High-Interest Rates
A bad credit score can lead to sky-high interest rates. This means that any loans or credit cards taken out may result in higher monthly payments and extended repayment terms. This, in turn, can drastically increase the amount of money you have to pay, leading to financial hardship over time.
High-interest rates resulting from a bad credit score can create a cycle of debt and credit crunching. Falling into this vicious cycle can be difficult to break free from, leading to extreme levels of financial stress. By being aware of the potential consequences of a bad credit score, one can make better financial decisions.
Limit Your Credit Card Usage To Avoid Bad Credit Score
Your credit score depends heavily on how responsible you are with your finances. Late payments, high balances, and bankruptcy can all lead to a bad credit score. To avoid this, you should always make sure to pay your bills on time and keep your debts at a manageable level.
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