[I]n today’s society, we hear so much talk about the importance of good credit scores. But many of us do not understand what creates a “good” credit score and what causes a “bad” credit rating. It is important to first remember that terms such as good and bad are merely ways for lenders to determine with whom they will do business. In most cases, your prospective lender has no idea who you are as a person. If your credit score is below 650, it is technically considered bad and it will be much more difficult for you to get credit.
The lowest possible credit score is 300, while the highest possible credit rating is 850. If your credit score is below 300 to 650, a lender very well may deny your request for credit. Fortunately, many lenders will work with you especially if your score is in the 500s or 600s. Once your rating dips below 500, you have very few lending choices and should consider not borrowing money until you can get your credit score in order.
Some people who always pay their bills on time are surprised that technically they have a bad credit rating. However, timely payments alone are not enough to create a great credit score. If you have high balances on your credit cards or a lot of new accounts, these are “red flags” to potential lenders. On a credit card with a $1,000 limit, you should keep a balance of about $333 or less. Otherwise, your credit rating suffers. Scientific data shows that people who keep their credit card balances close to the available limit are at greater risk of defaulting on their financial obligations.
If you did not pay bills on time or at all, you will have a harder time increasing your credit rating. The good news is that most negative credit only lasts for seven years. As each year passes, your credit score will increase as long as you pay your other obligations on time.
If you do have a bad credit rating, be careful about the companies with which you conduct business. Some make sizable profits from preying on people with credit scores below 650. If an interest rate is unreasonable, then walk away from the loan. Getting a new car is really not worth it if you know you cannot afford the payments and will end up losing your car as well as further damaging your credit rating.
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