It is very important to understand how your credit affects your ability to make purchases. Bad credit can affect your ability to make major purchases including a home or a vehicle. In some cases, it can prevent you from gaining employment. We have all heard of businesses that tell you bad credit isn’t a problem. However, that is not the reality of the situation. While they might be able to get you financing, you will pay a much higher interest rate due to having bad credit.

Your credit rating is based on several factors including your payment history, the amount of debt you owe, the possible amount of debt you can incur on revolving accounts, and the length of time you have maintained your accounts. These factors are combined to formulate your credit score. The maximum credit score possible is 850. The higher your credit score, the more likely you can obtain credit at a good interest rate.

Low credit scores indicate to lenders that you are a high risk. This means it is likely you won’t be able to repay the loan as outlined. You are labeled with having bad credit, and generally sent on your way without the loan you wanted.

How do you get bad credit? The most common way is by opening numerous accounts. On your credit score, they look at the total limit of credit you have available on credit cards and other lines of credit. The closer your actual balance is to the maximum, the worse your credit will look. Paying accounts late also plays a large role in paving the road to a bad credit rating.

Unfortunately, having bad credit is not something you can repair overnight. It takes a conscious effort to make all your payments on time. This often requires making some changes to your spending habits in an effort to reduce your total debt. Take time to think new purchases through. If it is not a necessity, you may want to use those funds to eliminate debt rather than to make a purchase.

If you have to purchase a necessity such as a vehicle, you might find yourself paying very high interest rates. If that is your only option, it is strongly suggested you pay the loan of as quickly as possible. This will reduce the amount of money you pay overall for interest. Be sure to find out if the loan has a penalty for pre-payment. You will want to shop around for one that doesn’t.

Having bad credit is a strike against you that affects many areas of your financial abilities. Work hard to keep credit card balances low, make your payments on time, and avoid unnecessary purchases you don’t need. These things will all help you stay away from having bad credit.

This entry was posted on Thursday, November 30th, 2006 at 10:18 am and is filed under Bad Debt, General Personal Finance. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.