What is bad credit?
A credit score or credit rating is a method used to determine the creditworthiness of the loan applicant. It takes the form of a number, with a higher number indicating better creditworthiness.
Components in the credit score
The following components are an important part of the calculation of the credit score :
- the punctuality of payments made in the past (taking into account only payments that took place more than 30 days late)
- the size of the current debt on credit cards and other loans, related to the maximum allowable debt
- the history of the various credits
- the type of credit used by the applicant
- recent requests for the credit status of the applicant.
A borrower can improve his credit score by correct payment behaviour, and by not fully utilizing the limit (s) on his credit card (s). Bad payment behaviour from the past “disappears” over time, but this is only after a few years.
Often the reason for a credit rejection is a bad credit rating.
The problem with this is that you are usually not informed about the reason for refusing the loan you want. In many cases, a bad credit rating, ie a low score and thus a lack of creditworthiness, is the decisive reason for this.
The credit score (probability value) helps companies or banks assess the credit risk of credit seekers and provides information about the likelihood that a person will meet their payment obligations.
But do not panic, if you are always aware of your own credit rating and keep an eye on it, you can take important steps in good time to get a better score and avoid a bad credit rating.
5 reasons for a bad credit rating
Below we have listed five causes that can lead to a bad credit rating, and you should pay attention to. In addition, we provide you with advice on every situation, with which you can avoid a bad credit rating.
1) You have made too many loan requests.
Sometimes, with increased credit inquiries, credit ratings may deteriorate within a short period of time. Why? The credit bureaus are signalled by the frequent requests that you find it difficult to obtain a loan. As this is mostly due to a financial distress and/or existing negative features, credit bureaus can downgrade your credit rating as a result. The result is then a bad credit rating.
Tip: Keep an eye on your credit rating and now check who saved what about you
2) Your expenses are higher than your earnings.
If you find it difficult to cope with your bills and financial obligations every month, it’s time to reduce your spending.
Many companies create a so-called “household bill” when calculating your credit rating. It is a comparison of your expenditures as well as income and shows how much income you have, for example, for credit installments. This, too, flows into the calculation of your credit rating with banks – and leads to a low credit rating with a small surplus.
Tip: In order to improve your financial situation, it is worthwhile to document your monthly expenses and income and set up a savings plan. Only then can you easily assess how much money you spend on what and where there is potential for savings.
3) You do not pay bills on time.
If you pay your bills on time and in full, that shows how well you can handle payment obligations. This has a big impact on your credit fulfillment probability and therefore on your credit score. Do not pay or too late, this leads to a bad credit rating.
Tip: Do not let it come to extremes and keep away from reminders, as they can exert a very strong, negative impact on your credit rating.
4) You have accumulated many unnecessary loans.
Nowadays we can finance a lot with credit – often this is necessary because we do not have the money to spend big expenses like buying an apartment or a car. The financing of your studies can quickly become expensive and may need to be paid with a loan.
However, there are often loans that are not necessary – for example, the 0% financing when you buy your new TV. Even installment credits for expenses that you can not actually afford, put you in financial distress. A 0% financing deteriorates your credit rating and thus your flexibility to take out loans in the future.
Another prominent example is the credit line of your checking account. With frequent use, it is often much cheaper to take out a credit line or installment loan.
Tip: Avoid using consumer credit as much as possible or try to repay it as soon as possible. If your account is permanently overdrawn, you should think about a rescheduling of your credit line on a favourable installment loan.
5) Your credit data is incorrect.
It is not uncommon for the credit bureaus to make mistakes. That’s why it’s incredibly important to keep an eye on your credit rating.
With credit bureaus, you have the opportunity to request information about your data for free several times a year. It may take several weeks to get, but it’s worth knowing what is on your credit report.