What is Bad Credit?

Bad Credit is a credit rating term. If you’ve defaulted on a loan or missed a credit card payment, for example, you can easily be labeled as a bad credit risk by financial institutions. This can make it difficult to get loans and means you will usually pay more interest on any loan you take out.

Having "bad credit" can be caused by a variety of factors such as:

• Not paying credit card bills or mortgage payments on time or missing them altogether
• Having a spouse with poor financial habits which affected your credit
• Having a low credit bureau score
• Having a bankruptcy
• Having been through a foreclosure

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What is a Credit Score?
A credit score is a 3-digit number based on a borrower's bill-paying history, debt profile and statistical information provided by lenders. The credit score is used to determine the likelihood of future credit behaviors, including whether you will pay on time.

Credit scores can range from approximately 300 to 850. A higher credit score means a better credit rating, low scores mean bad credit.

Your score may differ depending on which credit reporting bureau is computing the score since each uses different algorithms. The more negative marks you have on your credit report such as late payments, foreclosures, and bankruptcies, the lower your credit score will be.

Factors that will raise and lower your credit score are:

• Whether you pay your bills on time
• The types of credit you have such as auto loan, mortgage, credit cards, etc...
• Whether or not you owe on numerous accounts and how much you owe
• The amount of time you've been borrowing
• If you have had any bankruptcies
• If you have had any foreclosures

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How Bad Credit affects you

Your credit score will have an important impact on the interest rate you will pay when you borrow money. A low credit score indicates to lenders that you are a high-risk borrower and they may not be willing to lend you money. Or if they do lend money to you, you still may have to pay higher loan fees or receive a higher interest rate which will increase your monthly payment.

Loans of this type are known as "sub-prime loans" or "bad credit loans." They usually come with a higher interest rate, but they can also help you to consolidate your debt and to pay off credit cards. Get your FREE credit score and more!

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How to improve your Credit Score

It takes a lot of discipline to improve your credit and to break whatever bad habits caused you to be in the position of having bad credit.

Follow these steps to improve or "repair" your credit:

1. Stop using credit cards. Pay for purchases with cash. You'll find that it's a lot harder to spend your cash because it is more valuable to you.

2. Pay your bills on time! This is the best way to improve your score. Even if you've had serious delinquencies in the past, those will count less over time as you create a new history of paying your bills on time.

3. Pay off your debt. Never pay the minimum on your credit card balances because you will never get them paid off. Start paying off all your credit cards and loans from the smallest balance to the largest balance. When a credit card balance gets paid off, cut the card up!

4. Do not move your debt around. Consolidating your credit card debt onto one card or spreading it over multiple cards will not improve your score in the long run. It is best just to pay off the balances. You should close paid off accounts but they will probably not be removed from your credit history.

5. Don't take out several loans or credit cards too quickly. Opening too many accounts in a short period of time can look risky.

6. No credit = low credit rate! One huge flaw in the credit score calculation is that a person who is debt-free and has no credit cards or loans tends to have a lower score than someone who has credit cards which are managed responsibly. So don't be alarmed if you have a low credit score because of your lack of debt. Some financial advisors instruct people to get a credit card and use it every now and then so you can keep established credit. However, pay the card off in full every month. There is nothing wrong with this, but when you think about it, if you are debt free, then you do not need to rely on a high credit score to get a loan because you are most likely in good financial standings. The better solution in case you are applying for a loan is to have your financial institution manually "underwrite" your loan so they can see that you have good credit even though it is not reflected in your credit score.

7. Check your credit report for accuracy. It is possible that there may be a mistake on your credit report that can be easily cleared up or removed. See what information is on your credit report from the three major reporting agencies—Equifax, Experian and TransUnion.

Remember that repairing your credit takes time and discipline. If you follow the above steps, your credit will begin to improve over time. But the main advantage of following the above steps is get in the habit of good money management.

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What are the benefits of having Good Credit?

A good credit score is 700 or higher. There are many benefits to having good credit such as:

• Lower Loan Rates resulting in Lower Payments
  The biggest advantage of having a good credit score is being able to get lower interest rates on loans. You have a good score because you know how to manage your credit and you obviously make payments on time. Lenders know that you are less of a credit risk and are more willing to give you a cheaper interest rate. Having good credit saves you money because having a lower interest rate will make your monthly payments lower.
  
• The Ability to Shop Around

  Someone with a good credit score will be able to shop around for loans and for lenders. You can shop around for more types of loans since you qualify for more. You don't have to go with the first one you find. Having a good credit score means you have more options available to you. You can get loans with better terms and rates.

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Is your Debt out of control?

• You spend more than you earn
• You live paycheck to paycheck
• You don't know how much you owe on your bills
• You occasionally make late payments or find yourself having to pay late fees
• You pay only the minimum on your credit cards
• You put off paying one bill so you can pay another
• You take cash advances from credit cards to pay bills
• You've made withdrawals from your savings or retirement fund to pay bills
  

If you think your debt is out of control, don't panic. With a little bit of self-discipline and smart financial planning, you can learn how to get out of debt.

The first step is to carefully examine your monthly budget. By reducing your spending each month, you'll have more money available to pay down high-interest debt.

Try out our new Personal Budget Calculator tool to find out if your debt is out of control and what you can do to tame it.

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What is a Bad Credit Loan?

Whenever you apply for a loan, your credit history is reviewed. If you have good credit history, you may qualify for a loan with great rates, terms and conditions. But on the other hand, if you have bad credit history and a low credit score, you may have to settle for a bad credit loan.

Bad credit loans are far more expensive than conventional loans. The interest rate is extremely high and the processing fees and closing costs are much higher than normal loans. You may have to come up with a much higher amount as down payment.

If your credit score is below 490, the lenders may ask you to pay almost 30% of the loan amount up front. If it is 490 to 520, this may go down to 20% and so. No lender offers a 100% financing of a Bad credit Loan without recovering the costs through high fees and charges.

While your applications for other forms of loans will be rejected, your application for Bad credit Personal Loans may be considered and accepted even if you have a court judgment against you. With discipline and spending within your means, this could be a good opportunity for you to put your bad credit history in the past and work towards creating a new healthy credit rating. Don't buy too much house and make all payments on time. The next time you apply for a loan, you can very well apply for traditional loans with much better interest rates and terms.

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