Understanding and Repairing Your Credit After Hard Times

Many consumers and business owners wonder how to fix their credit and make themselves a better lending risk. There are several ways to repair credit over time, which ultimately raises a score. Now is as good a time as any for consumers and businesses to take an honest look at their credit score. In any case where you need credit, having a higher score means that you will pay less money in interest.

How Are Credit Scores Determined?

Every country manages consumer and business credit differently. For example, credit scores in Australia get provided by three major credit reporting bureaus Experian, Equifax, and Illion. American credit scores are calculated by Experian, Equifax, and TransUnion. This varies because not all creditors report information to all three of these credit bureaus. While a good percentage do, others report to one, two, or none at all. Also, the models among the three credit bureaus differ slightly.

Determining factors of a credit score include the history of foreclosure, the number of open accounts, the types of accounts, used credit balance vs. available credit, the length of credit history, and established payment history.

Why Is A Good Credit Score So Important?

Now, as far as attaining credit, it is not impossible with a low credit score. However, using a new car loan as an example, Experian's State of the Automotive Finance Market report came up with impressive numbers. A consumer with a credit score in the Super Prime (781-850) credit tier pays an average interest rate of 3.4%. Now, take that same car with a borrower in the Deep Subprime (300-500) credit tier, and they'll pay upwards of 13.79%. For example, on a $20,000 vehicle over 60 months, Mr. Deep Subprime has a monthly payment of $464, and Mrs. Super Prime's payment is $363. The $101 difference per month in the payment amount doesn't seem bad, but the difference in interest paid over the loan's life is why a good credit score is essential. Mr. Deep Subprime pays $7,903 in interest, while Mrs. Super Prime pays only $1,691 over the 60 months.

Coming out of a COVID economy, many people and businesses are dealing with bad credit. So (keeping up with our Australian example) if you’re a small business owner who needs to replace a vehicle you’re business depends on, if you look for bad credit car loans in Brisbane, you can find them and expect to get a vehicle. Just remember, not every loan has to go to term. If your score improves later, you can refinance the vehicle you needed then with your better credit score now and save some money on interest.

Tips to Fix A Low Credit Score

You don't have to panic; there are several ways to fix a low credit score. There's time and work involved, but when a borrower sees the better interest rate, as a result, it's worth the effort. Here are a few tips for borrowers to attain a better credit score.

Check for Fraud And Errors

When aiming to fix credit, a big part of the process includes repairing any errors and fraudulent accounts. That's why it's crucial to view credit reports at regular intervals, ensuring there aren't any instances of fraudulent use of credit or errors in reporting.

Pay Up Late or Past Due Accounts

Consumers should focus on paying overdue balances on their accounts. Once a payment reaches 30 days past due, creditors maintain the right to report the account to the credit bureaus. Credit marks have varying lifespans (like in the US bad credit marks disappear after 7 years).

Request A Higher Credit Limit

Consumers ask creditors to increase their credit limits on open lines of credit. If granted, it improves a credit score by increasing the gap between your used credit available credit. If you exercise some self-control and don’t use the new balance, it can have a substantial impact on your credit score over time.
Lastly, a consumer needs to look out for predatory lending. Predatory lending practices include high late fees, penalty interest rates, and illegal repossession of collateral like cash advance check cashing. This practice also occurs at any point in the loan process, like false advertising, high-pressure sales tactics, and unrealistic fee structures. If it sounds too good to be true, it definitely is. With these tips in mind, you can get started on the road to credit recovery.