12% of Americans Have No Chance of Getting Good Loan Terms

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And that's just one of the problems with bad credit.

When most of us go to take out a loan, we're worried about getting the best possible interest rate, but those with bad credit are more concerned about whether they'll get approved in the first place. If they are, they often have to take what they can get because few lenders want to work with them.

That's the reality that 12% of Americans face, according to our recent study of average credit scores in America. They have VantageScores less than 660, and to lenders, that reads like a report card full of Cs and Ds. It's not good. But fortunately for these Americans, this is not something they have to be stuck with forever.

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A bad credit score makes your life a lot harder

A score of 661 or above is considered to be a good credit score, depending on which scoring model you're looking at. The two most common scoring models -- the FICO® Score and VantageScore -- both use ranges from 300 to 850, and the higher your score, the better.

Your credit score is based on your credit reports, which are a record of how you've handled borrowed money in the past. Lenders check your score before they give you money because they want to make sure that they'll get it back. If your score indicates you might struggle to pay back what you borrow, they'll either deny you outright or charge you more in interest. That way, if you do default, they're not out as much as they would have been if they'd given you a lower interest rate.

Credit scores most often come into play when you're talking about loans or credit cards, but increasingly other institutions use them as a measure of both financial and overall responsibility. Landlords sometimes check credit scores on prospective tenants and some employers may check the credit of candidates, especially if the job requires the employee to manage company or customer funds. Even some cable and cellphone providers check your credit score when you apply. 

A score that falls into the 601 to 660 range is considered fair or "near prime," according to VantageScore. Your credit card and loan applications might not be denied if your score is near prime, but you'll probably pay much higher interest rates than those with higher credit scores. It depends on the lender, though. Each defines its own standards for acceptable credit scores.

If your score is 600 or lower, you'll find that few lenders are willing to give you the time of day, and landlords or employers might pass you over in favor of other candidates. The only way to change that is to raise your credit score.

How to raise your credit score

Raising your credit score isn't difficult, but it does take time and it helps if you understand the factors that influence it. Payment history is the single most important factor in your credit score calculation, accounting for 35% of your score. So avoiding late payments is paramount. 

Set yourself reminders or set up automatic payments where you can. If budget constraints are part of the issue, cut expenses or increase your income until you can make ends meet. Late payments stay on your credit report for seven years, but their effect diminishes with time, so if you make a habit of paying on time, you'll start to see your score rise after a few months to a year.

Your credit utilization ratio is nearly as important as your payment history. This looks at how much of your available credit you charge to your credit cards every month. If your credit limit is $10,000 and your balance is $2,000, your credit utilization ratio is 20%. Aim to keep yours lower than 30%, as a higher ratio indicates a heavier dependence on credit. 

You can lower yours by using your credit card less, raising your credit limit, or paying your credit card bill twice per month. Your lender only reports your payments and new balance to the credit bureaus once per month, so if you pay yours off halfway through the month and again at the end, it'll seem like you used your credit card much less than you did.

Limit how often you apply for new credit. Every time you apply for new credit, the lender will do a hard inquiry on your report and this drops your score by a few points. It's not a big deal if you're approved, but if you're denied, you just hurt your score for no reason. There is an exception built in for loan shopping wherein any inquiries that take place within a 30-day period are considered a single inquiry to avoid penalizing you too much for normal comparison shopping behavior. 

Even if you follow all of the above steps, it'll take a few months to a few years before you see any significant improvement in your credit score. You'll have to wait for some of those old black marks to be superceded by your new, more responsible credit history. But don't get discouraged if you don't feel like your score is improving quickly enough. Stay the course and you'll get there.

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