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Did you know that around 16% of Americans have bad credit? That’s about 48 million people! Having bad credit means your FICO score is between 300 and 579, which can make it harder to get loans or credit cards.
Bad credit usually happens when you struggle to keep up with payments for things like rent, loans, credit cards, and utilities. Your credit score is used by lenders to decide whether they should lend to you and what rates and terms to offer. When you consistently miss payments or pay late, your credit score can drop, and that’s when you’re considered to have ‘bad credit’.
Unfortunately, having bad credit may make it more challenging to get affordable finance from well-known banks and credit card companies. If you do get approved, you might face higher interest rates to compensate for the potential risk of you defaulting on payments.
In fact, only 1.2% of Americans have perfect credit scores of 850. On the other hand, 18% of individuals have fair credit, with FICO scores between 580 and 669.
Important Things to Know
- According to reports, around 16% of Americans have a credit score between 300 and 579, which is considered bad credit.
- Having a bad credit score can make it more challenging or costly to obtain credit.
- About 18% of Americans have fair credit.
Understanding Credit Calculation: Explained in a Friendly and Helpful Way
Did you know that credit scores play a crucial role in determining your financial health? If you’re curious about how credit is calculated, let’s break it down in a simple and relatable way for you.
Credit scores are determined using a range of numerical algorithms, which are managed by the main credit reference bureaus like Transunion, Experian, and FICO. These algorithms use numbers to calculate your credit score, providing a clear picture of your financial standing. It’s important to note that your credit score can fluctuate either upwards or downwards based on your ability to repay any credit or financial products.
The impact on your credit score and the extent of its change depends on the specific financial products you engage with, as well as the timeliness and success of your payments. Let’s take a closer look at some examples:
- Car leasing
- Credit cards
- Loans, including payday loans
- Utility bills
- Cell phone bills
- Being associated with someone with bad credit (such as being married or having a joint mortgage)
By better understanding how your credit score is calculated, you can actively manage and improve it. Remember, maintaining a good credit score can positively impact various aspects of your financial life.
Which Products Contribute to Americans’ Bad Credit?
Let’s take a look at the products that are most commonly associated with bad credit and how they can impact your financial well-being.
Credit cards: Credit cards play a significant role in contributing to bad credit scores. On average, Americans have (x number) of credit cards, accumulating an average debt of (x number). While credit cards are convenient for everyday expenses like coffee, groceries, and shopping, it’s easy to accumulate debt. The ability to make minimum payments, carry balances, and obtain new cards with minimal checks can lead to bad credit over time.
Loans: Whether it’s a personal loan, mortgage, short-term loan, or payday loan, failing to repay or missing payments on a loan can negatively impact your credit score. It’s crucial to carefully consider your ability to repay any loans before accepting them. Relying on one loan to pay off another often results in bad credit and a cycle of debt.
Car leasing: Opting for car leasing and upgrading to a new vehicle each year may seem enticing. However, it comes at a price. Car leasing requires paying a monthly fee, along with additional expenses like road tax and the rising cost of gasoline. This can become burdensome, particularly if you want to impress others or have a long commute to work.
Everyday bills: It’s important not to overlook the impact of everyday bills on your finances. Expenses such as water, electricity, internet, energy, cell phone, cable, gardening, and home improvements can strain your budget. If you have a family, expenses related to food, school, and entertainment further add to the financial burden.
By understanding how these products can affect your credit, you can make informed decisions to manage your finances effectively and avoid falling into bad credit situations.
What Loan Options Are Available For Americans With Bad Credit?
There are several loan options available for individuals with bad credit. While having bad credit may increase the risk and decrease the likelihood of approval, there are numerous lenders and products that specialize in helping individuals in this situation.
To be eligible for these loan options, it is important to have a regular income and employment. This demonstrates that you have a steady source of income that can be used for loan repayments.
For unsecured loans such as personal or payday loans, it is crucial to show that you are actively working to improve your credit score and making an effort to make timely repayments for previous credit card bills and loans.
If you are unable to meet the criteria for unsecured loans, you can consider a collateral loan. This involves utilizing a valuable asset, such as your home or car, as security to borrow funds. This type of loan is commonly known as a title or secured loan.
If you have very bad credit, an option you can explore is using a credit union. Credit unions are charitable or non-profit organizations that offer borrowing opportunities at low rates. However, it’s important to note that accessing funds may take a bit longer if you require them urgently.
If you would like more information about credit unions, you can visit their website: https://www.ncua.gov/.
Does Having Bad Credit Affect Your Loan Interest Rates?
Certainly! When you have a bad credit score, banks, card providers, and lenders consider you to be a riskier borrower. To account for the increased possibility that you might not repay the loan, lenders may offer you a loan but at a higher interest rate.
For instance, if someone with good credit might get a personal loan starting at around 7% APR, someone with bad credit might face an interest rate of about 35% APR.
Moreover, having bad credit can also limit the amount you can borrow, the loan duration, and the available options. You might find yourself with fewer unsecured loan choices and more emphasis on secured loans or title loans to secure approval.
How Can You Improve Your Credit Score and Build Good Credit?
Make timely payments (most important) – The key to building and maintaining a strong credit score is consistently making on-time repayments for loans, credit cards, and bills. This demonstrates to lenders that you are a reliable borrower. Avoid using minimum payment options for credit cards or loan arrangements and make a conscious effort to repay on time.
If you have multiple outstanding debts, you may consider using a debt consolidation loan to combine them into a single payment. It could be helpful to consult a debt professional for further guidance.
Borrow within your means – While it’s tempting to open multiple credit card accounts or apply for loans, it’s essential to only borrow what you truly need. Proper budgeting is crucial in managing your income and expenses. Taking on excessive debt may give the impression that you are living beyond your means. It’s advisable to close any cards or loans that are no longer necessary.
Avoid financial associations with individuals with bad credit – This doesn’t mean cutting off ties with them! However, sharing a credit card, loan, bank account, or mortgage with someone who has bad credit can impact your own creditworthiness. Lenders consider such close financial connections, and if the person encounters financial trouble, you might be drawn into it as well. If possible, avoid having joint accounts with individuals with bad credit, like siblings or friends.
Regularly check your credit score – One of the best ways to improve and maintain your credit score is by monitoring it regularly. While you don’t receive automatic updates, you can request a credit report from the credit reference bureaus (sometimes for free) or pay a small fee each month to stay informed about your credit score and its changes. The bureaus may even provide suggestions, such as paying off specific loans or utilizing credit builder products, to help boost your score.