A poor credit score costs you more than just opportunity. Many see a diminished score as a hurdle in the drive to buy a house, finance a home improvement, or enable a lifestyle. However, a diminished score is more than just an impediment. When you suffer from bad credit, you expose yourself to greater risks and higher costs. A poor score can cost you a lot of money. This cost often goes unrecognized because it’s less tangible than the act of removing money from your wallet. In this article, we’ll review the impact of poor credit and what you can do to improve your score measurably.
A poor score amplifies the cost of living. Consider these five critical aspects of life that burden poor credit holders with greater costs. Insurance premiums rise as one’s credit score falls. A superb score isn’t merely a hindrance to a healthy credit line. Without proper credit, the very cost of insuring yourself rises dramatically. Policy analysts at Appleseed, a pro bono organization, have concluded in their published report, The Value of a Credit Score, that poor or non-existent credit can result in “the equivalent of a two-month utility payment deposit or even up to a $1,000 security deposit.” This additional cost is only the beginning of the problems. The report also concludes that contract cell phone service will likely require a security deposit ranging between $500 and $1,000. Critically, denials in rental housing occur, and in some cases, lost job opportunities trace back to bad credit. Poor credit is just another bill. Only, it’s one that you can’t hold.
Commit this phrase to memory: “use it or lose it.” Credit scores confuse and intimidate many of us. Consider bills that you are already paying monthly. You can rebuild and improve credit by placing payments that you already regularly handle with a check or cash onto a credit card. Those with bad credit often retreat from their cards. Instead, you must prove that you can use credit responsibly. If adding more regular bills to your credit card is too burdensome, start small. Even small regular payments can add points fast, sometimes in as few as 30 days.
You can also leverage close relationships for an improved score. If you have a close family member with a strong credit history, consider requesting that they allow you to join their account as an authorized user or a joint owner. There is no need to use the account, simply having your name connected to a respectable payment history will boost your score without the hassle of applying for a new card or accruing a high balance, and making large payments.
Bringing 75 points onto your score will require a little more commitment. Avoid the urge to engage in lower limit cards or reducing the limit on an existing card. When calculating a score, the major bureaus devote 30% of the analysis to the amount of credit used. With a higher limit, you’ll represent a lower percentage of use. If your limit is too low, even a moderate balance will reflect high credit usage. Try to keep your usage in the range of 25% of the available credit limit.
To achieve this effect, you may need to open a new card. This new card will have the two-fold result of reaching a higher credit limit, reducing your usage while also diluting the older card’s weak credit. Remember that opening a new card can cause as much harm as good. Use the credit responsibly. Use this new card sporadically and for small balances only. The little balance strategy allows you to quickly meet payments while keeping a safe distance from the credit limit. In the meantime, don’t focus on old debts. If you have an unpaid balance that’s greater than six years of age, leave it alone. In many states, debts this old dissolve from your credit report. Focus on the here and now. As with any plan, your organizational skills will be critical. Set automatic calendar alerts and notifications. Juggling several cards and various credit limits is complicated. Don’t let the strategy consume you.
A significant increase in your score will call for a bigger commitment. A positive movement of 100 points will result in some very concrete improvements to your financial life. Research the viability of reducing your credit card debt through a payment secured with a home equity loan. This decision carries risk because a default puts your home at risk. However, the benefits are also significant. While the balance on your mortgage will increase, this will not adversely impact your credit score; it will help as you’ll be making a large payment to eradicate a past due balance.
This strategy will require that you have some existing equity in your home. This home equity is a secured loan that offers a low-interest rate. This reduced rate is another advantage. The interest you’d be paying on a credit card balance far exceeds that of a home equity loan. More of your money goes towards reducing debt, and less goes to the credit card companies. As discussed above, a lower balance on your credit card relative to the available credit limit will significantly lower your usage. The result is an improved score over a short time horizon. Suppose high-interest rates are the only factor making your monthly payments difficult. This is a desirable option. Again, consider the risks; if you have any reason to believe that your payments will stop, think twice about this aggressive measure. In the end, you could lose your home, which is a far worse repercussion than a poor credit score. If you follow through with this approach, be sure to maintain a balance on the card so long as you pay it in regular, monthly installments to illustrate to the credit card companies that you are once again a responsible borrower.