Low Credit Score

What is a credit score?

A credit score symbolizes credit risk-a prediction of the likelihood bills will be paid on time. While there are many different types of scores and scoring models, a higher credit score is generally awarded more favorable credit terms. A credit scoring model may consider the following factors to calculate a credit score: payment history; length of credit history; types of credit accounts that a consumer already has open; the number of credit requests that have been made; and the amount of credit used compared to the amount of credit available. A credit score is important to both lenders and consumers and often results in more favorable credit terms. Favorable credit terms may equate to lower payments and lower interest paid over time by a consumer.

Problems Resulting from a Low Credit Score

A low credit score can result in loan or line-of-credit rejections. This can include mortgage loans and credit cards. In some states, you may have to pay more for car insurance if you lack a credit history or if you have poor credit. New York and Florida are among the states that more than double car insurance rates for poor credit. Consumers with poor credit may also have trouble opening a new cell phone contract. Wireless phone providers check credit scores before taking on new customers. Poor credit can lead to required security deposits for utilities such as gas, electricity, and water when a consumer moves into a new home. And, as part of background screening, employers may view a portion of an employee’s credit report. This enables a hiring manager to evaluate how money has been handled, especially if an employee is applying for a financial position.

How Can I Improve a Low Credit Score?

There are ways to improve a low credit score. Checking your credit score can help you determine what is driving the score. Paying bills on time and avoiding late or missed payments can help raise your score. If you suspect any errors on your credit report, including inaccurate personal information or accounts resulting from fraudulent activity, a dispute should be opened with the credit bureaus. Paying down debt can improve your credit utilization rate, which impacts your credit score. Strive to pay off your credit card bill in full each month. Delay applying for new credit if you want to increase your credit score. A hard inquiry occurs when lenders check your credit to evaluate your credit worthiness for a financial product. Credit risk is considered greatest if you are attempting to borrow money from many different sources.

Whether you are attempting to build credit or repair poor credit, work diligently to pay bills on time, maintain low balances on credit cards, and seek new credit only as necessary. Good or excellent credit scores can provide savings over your lifetime regardless of your income level. Practice or adopt good financial habits to grow your credit and help you take advantage of lower payments and lower interest rates.