Credit cards help to save money and earn rewards, which are some of its biggest attractions. But perhaps the most beneficial one is that it helps to build your credit score. From signup bonuses to cashback offers and frequent flyer miles, credit card companies are ready to lure users.
It is good in a way because more use of credit cards gives more opportunities for building a good credit score. Those with bad credit can take heart from the fact they too can get a new credit card. To know more about it, you can look on the internet to read about Legacy Visa Credit Card Review – A Second Chance at Good Credit.
Often there is a stigma attached to poor credit score that reflects the irresponsible behavior of people in handling credits. But there are times when unexpected high expenses because of medical bills or something else can put you in an awkward financial position and dent your credit score.
To deal with poor credit, you must understand the implications of credit score that has a close relation to your financial freedom. Higher credit score allows people to enjoy more credit at better interest rates as they have wide acceptability among lenders. However, this does not mean that those with bad credit would remain complete outcasts. People with subpar credit score have the least options for getting credit cards. It gives them some hope because it may be difficult for them to get credit cards but surely not impossible.
Risk evaluation by credit card companies
Credit card companies operate based on mutual faith, assuming that all users would honor the faith that credit card companies repose on them. But they want to be sure that the person who gets a credit card is reliable enough and carries low risk in borrowing, which is why they refer to the credit score.
By looking at the credit score credit card companies evaluate the creditworthiness of individuals to ascertain the risk level. Higher is the credit score lower is the risk as well as the interest rate. That is why credit card companies charge lower interest on cards issued to people with a good credit score. On the other hand, the credit companies look upon people with a poor credit score as potentially high risk and do not issue cards at all or even it does charge much higher interest.
As stated earlier, a poor credit score does not completely shut the door of credit cards, but there is some faint hope of getting it. All is not lost, and it is possible to recover some of the lost ground as you will discover on going through this article.
Understanding credit score
So far we have talked about good and bad credit score but what kind of score is bad? There is no defined parameter as it depends on credit card companies that have varied limits. But usually, a credit score of 700 and above is considered good, and a score between 800 and 850 is excellent. As you come down the scale, the credit card companies and lenders perceive it as a sign of increased risk, and it keeps hurting your prospects of availing credit. Having a credit score between 300 and 579 can be bad or very poor, and chances of availing credits are very bleak. Prospects are a little better for those scoring between 580 and 669 because they belong to the category of subprime borrowers.
Factors that affect credit score negatively
A credit score is the numerical representation of your credit report based on your credit history. Many factors contribute to it, among which the extent of credit that a person carries is one of the significant factors. Besides, other factors have links to your behavior in handling credits and borrowing that displays the kind of financial discipline you maintain. A person who frequently applies for credit would be hurting his or her credit score as it as a sign of fiscal indiscipline that relates to less reliability of borrowers. Court judgments and bankruptcy filing can cause serious damage to credit score with the latter wiping out the score entirely. Again, frequent change of address is a sign of instability. That can negatively impact credit score just as it can be bad when you miss payments or make late payments.
How to know your credit score
Instead of waiting for a rude shock of refusal when applying for credit cards, it is better first to ascertain the prospects of getting cards by knowing your credit score. Knowing the credit score helps to time the application because you can wait for some time to improve the credit score and then apply for it. A free copy of credit report is available from the credit rating agencies Equifax, Experian, and TransUnion. To place a request, you can log on to the website AnnualCreditReport.com or call the toll free number. If denied credit, you have the right to see your report within 60 days of the incident or is the report is inaccurate, or you are unemployed and on welfare.
Build your credit score
To build your credit score, you must not only use credit cards but also be aware of the factors that have the highest impact on credit scores. Credit utilization and payment history are the top impacting factors. So you must ensure that you pay all bills and not only credit card bills on time. Act with restraint in using credit cards and do not use more than 30% of your credit limit on any card but always try to keep it as less as possible close to 10%.
To create longer payment history, keep accounts open as far as possible. Avoid opening too many new accounts in a short period because each application dents your credit score slightly and new accounts lower your average account age. Check your credit score periodically to ensure that it is correct and if you detect mistakes, get it rectified quickly.
Having a good credit score places you in good stead in all financial matters and boosts your image as a responsible borrower.