According to one report by Forbes in 2020, more than 1 out of 5 credit card users do not understand how credit scoring and ratings work. Consequently, they are not mindful of their spending behaviors that ultimately reflect on their credit accounts and lower their scores. Unfortunately, the reality hits when they a need loan or a mortgage or apply for a new credit card. This is when they could be denied. Similarly, building a good credit score isn’t a walk in the park.
But fixing a lousy score is definitely more complicated and takes more time than establishing a good rating. The following is why fixing a lousy score may drain you rather than establishing your best foot with a good credit rating.
Understanding credit rating and scores
First things first, you need to understand what credit scores mean. This is a three-digit number calculated from your credit report and reflects your credit profile. The rating is a critical aspect of your financial status because it influences many things. Including whether you can qualify for a mortgage, new credit cards, auto loan, and your limits for the three provisions. In addition, credit ratings reflect your spending and debt repayment practices and influence how much lenders can trust you with their money.
How are credit rates valued?
Valuation differs from one company or credit lender to the other, but according to FICO Scores, the following are the applicable rating valuations:
● 300- 579 poor
● 580-669 fair
● 670- 739 good
● 749-799 very good
● 800-850 exceptional or excellent
Any score above 670 points makes one eligible for most benefits and credit awards. Generally, though, 700 points are the price point, and anything below it disqualifies one from most credit card awards.
What does it take for your credit to be rated bad?
There are a few factors for the credit bureaus to rate your credit as bad, including:
1. Not paying bills on time
Your payment history is the most critical factor in determining your credit ratings. Interfering with it automatically messes with your credit profile and scores. For instance, the credit bureaus check whether you pay on time, i.e., before the billing cycle ends.
If the answer is yes, they go ahead to find out whether you pay the minimum amount or the maximum, or if you just play along and pay somewhere between the minimum and maximum values. The worst-case scenario is when you default payments and by how many days. Failing by 30, 60, 90, and 90+ days affects your card, but the longer the period, the heavier the penalty.
2. Spending more than you are allocated
A credit utilization ratio is another determinant of your credit score. It is the percentage of what you owe concerning what you are allocated. The higher the ratio, the worse the scores on the credit card. Generally, 30% and below is considered safe, but making it as low as possible is the best approach.
3. Haphazard opening of new credit accounts
In calculating your credit rating, the credit bureaus consider how many credit accounts you have and how old they are. Opening accounts lead to a hard inquiry and even if you are denied and do not have credit, if you have a number of inquiries, it shows creditors you are in need of funds, fast. This penalty temporarily drops your rating and definitely impacts the overall scores. It is worse when you have a young credit account and apply for others. Therefore, while you may be after opening credit accounts to boost your score, be cautious not to give your credit a lousy rating.
4. Haphazard requests for credit limits
When you qualify for credit limit increment, this is an advantage on your side because as long as the balance remains the same. Your utilization ratio automatically goes down since you now have a more considerable margin.
Generally, most organizations allow clients to apply for the increment every six months. However, keep requesting a limit increment before the six-month end and do so for a young account and your ratings might keep deteriorating.
5. Failing to monitor your credit profile
Most credit users only review their credit profile when falling on late payments, and this is dangerous. The main reason for this is that the card might be having some errors and penalties lowering its rating. Still, because you don’t check the profile, you don’t notice the mistakes. In some cases, some severe errors have seriously cost people credit scores. However, using companies like Credit Sesame can provide you with monthly checks and updates to keep profile your credit on the up and up.
6. Letting accounts go dormant
When people have multiple credit cards and realize that one particular card earns them many benefits, they tend to leave the old ones inactive. Before they know it, the accounts are dormant. As time advances, the bill for the static card drops scores becomes inactive and may be foreclosed. Yet, every foreclosure of an account reflects on your overall rating. Before you know it, you will be below the excellent limit.
Why does it take longer to fix a lousy rating than establish a good credit rating?
Unfortunately, reversing any of the aforementioned problems may take a long time.
For instance, falling off on payment for 90+ repeatedly or having many errors whose correction deadlines have passed may not be easily reversible, hence the more time needed.
However, it does not take as much effort to establish a good credit trend. You can turn to credit-building credit cards, which may be secured and offer low limits, to provide a low utilization ratio and help you to establish an on-time payment history. Cautiously request credit increment, open new credit accounts, and keep good credit history. Your credit profile steadily grows. You will have a good to an excellent rating in no time.
The bottom line
Fixing a bad credit score and establishing a good credit trend both take time. However, repairing a messed-up rating is more demanding than setting a good direction because reversing the causes of the bad scores is not as easy as establishing a good movement. But, all in all, there is always a way out to tackle the two cases.
Rose Rosie is a writer for the personal finance website, Joy Wallet, which provides readers with useful information, resources, and tools to help maximize their financial fitness.