How Can a Negative Credit Report Affect Your Financial Goals?

If you have a negative credit report, you may face extra trouble applying for a new credit card, auto loan, or mortgage—and once you are accepted for a loan, you can expect to be charged higher interest rates. 

However, don’t let your negative credit stop you from achieving your long-term and short-term financial goals. Read further to know more about how bad credit affects your everyday life and how to improve your credit score quickly.

What is a Bad Credit Score?

Several factors lead to a bad credit score, such as delayed payments and carrying a balance on your credit card. Identifying and rectifying the factors that harm your credit score and having a negative credit report is necessary.

A bad credit score usually falls under 580 in the 300 to 850 range and is based on the details in your credit report. It is harder for those with negative credit reports to acquire loans or apply for a new credit card as lenders need to know how likely you will repay them with interest.

In the FICO scoring model, a bad score falls below 670. Read more to discover how to improve your credit to the good credit score range, i.e., 700 or higher in the 300 to 850 range.

Another scoring model, the VantageScore, uses a score range of 300 to 850 to determine whether your credit score is a good or bad one. Designed by the three major credit bureaus (Equifax, TransUnion, and Experian), a 601 – 660 score is reviewed as fair, whereas scores varying from 300 to 500 are considered poor. 

You can easily qualify for credit at better terms and interest rates with a good credit score. It is difficult to acquire loans at affordable rates and qualify for a loan or credit card with a low credit score.

With bad credit, you may face the following hurdles:

• Unavailable or expensive loans: Refusal when applying for new lines of credit or loans such as mortgages, auto loans, personal loans, student loans, and credit cards.
  
• Difficulty while house hunting: Struggle with getting a rent application accepted. Bad credit affects non-lending decisions. For instance, if a landlord agrees to lease you a house or apartment after evaluating your credit report and payment history.
  
• Security deposits for utilities: You may be required to pay a security deposit before moving into a new place for utilities like electricity, water, and gas.
  
• Higher rates: Many cell phone providers will check your credit before catering to you to see how likely you are to pay bills on time.
  
• Unsuccessful job hunt: Employers may look at your credit report before recruitment or making any promotional decisions to evaluate your financial management skills. They will closely look at the activities that lead to a poor credit score, like skipping or delaying payment.
  
• Higher insurance rates: Insurance companies also use insurance scores based on your credit to determine how much you can pay for auto, home, and life insurance premiums.

How You Can Improve a Negative Credit Report

Credit scores change with the shift in information in your credit report. This means you can manage your financial status and do activities to enhance your credit score.  

Take the following approaches to improve your bad credit:

1. Assess Your Free Credit Score

Review your credit score free of cost to assess the factors affecting it.

The following factors have the most impact on your credit score:

• Payment history – 35%
  
• Credit utilization rate – 30%
  
• Duration of credit usage – 15%
  
• Credit mix – Installment or revolving accounts – 10%
  
• Latest activity and recent credit accounts. Opening a new account can lead to hard inquiries, which may pull your credit score low – (10%).

It is advised to check your negative credit report for any erroneous entries and dispute the negative information with credit bureaus. Fixing errors such as incorrect personal information or fraudulent accounts opened in your name will positively influence your credit score.

2. Payment History

Your payment history accounts for 35% of your FICO Score. Establish an autopay system for recurring payments such as bills, student loans, and auto loans. Ensure your current account has sufficient finances for payments, or you could be subjected to extra charges for late payments.

Contact your lender or creditor to know more about alternative payment plans that decrease the amount you have to pay monthly for student loans.

Banks or credit card unions might lower your payment or interest rate till some time if you are facing any financial constraints. 

3. Partial Debt Payment

Debts amount to 30% of your FICO Score, making it the next biggest allotment second to payment history. Utilizing a maximum of 30% or below the allowed credit limit is recommended.

Pause utilization of your credit cards and make partial debt payments (pay down debt) if you cannot pay off your credit card in full every month and are carrying a balance. Using the “debt avalanche” method for paying debt payments will save you the most money in interest. 

Another way to pay off small amounts is by using the debt snowball method, which motivates you to knock off each remaining balance as you gain momentum.

Opt for a ‘balance transfer credit card’ if more time is needed to bring your balances down. This card lets you pay off your remaining balances interest-free without making additional payments over time.

4. Keep An Eye Out for New Hard Inquiries

You might want to keep away from or postpone applying for new credit if you look to improve your credit score, as hard inquiries may affect your score. Lending institutions examine your negative credit report in order to evaluate and determine your financial capability of repaying the amount borrowed. Moneylenders consider those who apply for loans from several institutions a great credit risk. New credit account requests amount to 10% of your FICO Score.

Checking your credit score is also a soft inquiry on your credit report, which does not affect your score. Credit card lenders may also review your report to approve you for certain services. 

Applying for only one car loan or mortgage with several issuers in a short period will not significantly affect your credit score.

5. Build Up Your Credit

Another way to build up your credit with your current financial history is by using Experian Boost. After signing up free of cost, Experian will browse through your account information for utility, telephone, and cable clearances. You have the liberty to pick which accounts to connect to your credit portfolio. Adding the selected accounts will instantly generate your new credit score. 

The new beneficial payment history may increase your FICO Score, especially if you have low or poor credit. 

6. Seek Assistance With Building Your Credit

Positive credit history can be built with the help of credit counseling agencies or via a secured account if you cannot receive approval for a new credit card or loan.

Implement the following strategies:

• Turn into an authorized user on an account that does not belong to you.
  
• Get a cosigner with good credit to assist you with applying for a loan or a new credit card. Cosigners are equally responsible for the repayment of a debt.
  
• Activate a secured account. The credit card issuer permits you to borrow an estimated percentage of the amount deposited in your account.

Bottom Line: Good Credit Puts Money in Your Pocket

Good management of credit leads to increased credit scores, which in turn lowers your cost to borrow. Smart financial moves such as maintaining a 30% credit utilization ratio and making timely payments can improve your credit history while building up your credit score.

A negative credit report and history make it difficult to get access to new lines of credit, types of loans, mortgages, and may even have an effect on your job prospects.