Millions of Americans each year succumb to more debt and have bad credit scores, affecting their ability to borrow money online and in any form. Approximately 16% of US citizens have bad credit scores today, with this figure rising more each year. But, the question is: why are so many Americans facing bad credit?
For many people across the USA, bad credit is a hindrance to being able to secure a loan, financial arrangement or line of credit, meaning that people with poor or bad credit need to either turn to loans for bad credit, tailored towards people with bad or even very bad credit scores or they are simply unable to borrow the money they need for any reason, potentially pushing them into further debt.
What Is a Bad Credit Score?
A credit score is a number (measured between 300 and 850) which represents an individual’s creditworthiness. A credit score is built once someone begins to borrow credit. For example, through a credit card or even a mortgage; there are many ways you can build a credit score.
A good credit score, depending on the model used to calculate it, typically ranges from 690 to the upper end of 850 which is generally considered an excellent credit score. Conversely, a bad credit score can be measured between 300 to 629, with 630 to 689 being considered a fair credit score.
When applying for any type of loan or ongoing payment, lenders will then run either a soft or hard credit check (with a hard check potentially affecting your score slightly) to see if you’re eligible to borrow the money you need. It doesn’t matter if you need to get a $500 loan or borrow $5000, your credit score will have an impact regardless Having a bad credit score presents you as unreliable as a borrower, and can affect whether you qualify for many things – from jobs, rental properties to mortgages.
What Are the Top 10 Causes of Bad Credit in the USA?
There are many things which can cause bad credit, from checking your credit score yourself too much, to applying for too many loans, like online payday loans and others. Below, we have compiled a list which shows what the top 10 causes of bad credit are in the USA.
1. Late Payments
When you borrow money in the form of a loan, you will by law have a repayment method set up between you and the lender. Repayments, alongside interest, must be repaid in the set agreement. Otherwise, you will be charged late penalty fees alongside additional interest.
Many borrowers, however, repay their loans late or do not repay at all. Doing so will affect your credit score and worsen it, as it only reinforces that people with bad credit are untrustworthy borrowers. If you’re struggling with your loan repayments, then it is strongly advised you contact the direct lender to discuss alternative repayment methods. For instance, extending the period of time to which you can repay.
2. Bankruptcy Filing
Filing for bankruptcy is a legal proceeding which provides relief to those who are unable to repay any ongoing debts. By doing so, it provides legal protection to borrowers. However, filing for bankruptcy definitely affects your credit score.
When filing for bankruptcy, this will remain in your credit report for up to 7 years. Consequently, making you an unsuitable candidate to many lenders long-term.
3. Defaulting on Loans
Defaulting on a loan essentially means a borrower is no longer repaying the loan according to the payment agreements made beforehand. Lenders will then regard a loan as defaulted, and means late penalty fees, repossession of collateral or lawsuits may occur.
In addition, defaulting in a loan will affect your credit score in the future, making it extremely difficult to borrow a loan again.
4. Maxing Out Your Credit Card
Maxing out a credit card means you have reached, or tried to exceed, the limit for how much you can borrow on a credit card. In such instances, this means there is no credit left for you to borrow to make purchases. As a consequence of maxing out a credit card, you will then have a 100% credit utilization for that specific credit card. Meaning, you will damage your credit score and limit yourself for future borrowing.
5. Applying for Too Many Loans
While this may seem obvious, applying for too many loans in a short period of time will greatly damage your credit score. When you apply for loans, in any form, lenders will run a thorough background check which will affect your credit score. Therefore, applying for many at once will result in a worsened credit score.
It is therefore sensible to be aware of how much money you need to borrow when you need it. Rather than borrowing $500 and then needing to do so again, consider whether you can simply get a 1000 dollar loan in one go, reducing the number of loans you will have outstanding as well as the number of loan applications you will need to put in for.
6. Account Closure
Just as it happens when you’re opening a new line of credit, closing an old bank account or credit card account can cause your credit score to worsen slightly. Many people consider closing old credit card accounts due to no longer using them. However, lenders prefer candidates with longer credit histories so keeping these open, if they do not have annual fees, is a good option.
7. Length of Credit
Another factor which will cause bad credit is by not taking out forms of credit sooner. While it is important to not borrow any loans you cannot afford, it is strongly advised to take out a loan, such as a credit card, as soon as you can. By doing so, it will help lengthen the period of time of which you have taken out credit, meaning you can help build up a better score.
Nonetheless, short credit borrowing is also fine, as long as you repay the loan back according to the agreements and have not encountered any late payment fees.
8. Types of Credit in Use
What types of loans you borrow at the same time will affect your credit score. For instance, if you only borrow a credit card it will likely affect your credit score. This is particularly pertinent for those with little credit history.
9. Getting a Judgment
A judgment means the court has got involved with your loan borrowing, and has formally concluded that you owe a certain amount of money. Not only will this show future lenders that you couldn’t repay the loan, but the law had to get involved. Therefore, worsening your credit score.
However, when facing a judgment you will still have a second chance to repay the loan – so by doing so, it could help your future application.
10. Amount Owed
Lastly, while it may seem evident, how much money you owe will affect your credit score. If you are borrowing many loans and you are using 30% more than your available credit then this will not only lower your credit score but also present you as an unfavorable candidate to lenders.
How to Fix Bad Credit?
Having read the Top 10 causes of bad credit, you should hopefully by now have a better idea of what not to do when wanting to improve your credit score. Even if you have a bad credit score, it is still possible to achieve a good credit score.
Generally, applying for a loan with bad credit is still possible. However, it is important to consider all of your personal finances beforehand and even consider alternative avenues to money borrowing. As having a bad credit score can affect not only loan borrowing, but also being able to apply for rental properties, jobs and much more.