Many people don't take a class on personal finance in high school or college. So when they enter adulthood and acquire their first credit account, they likely make a few credit mistakes that result in an adverse credit rating. Even if you have a low credit score due to bad credit habits you can get rid of an adverse rating and increase your personal score.
Causes of an Adverse Rating
A pattern of unwise credit decisions can bring down your personal credit rating. Using credit wisely involves paying your credit card accounts and installment loans on time. Consistency is the key and several months of late or skipped payments result in additional fees and an adverse credit rating. Carrying a large amount of debt also damages your personal score as does ignoring creditor phone calls and having a delinquent account sent to collections. Additionally, filing bankruptcy, losing your home to foreclosure and a car repossession can severely lower your credit rating.
Effects of Bad Credit
Adverse credit can have a snowball effect and ruin your chances of acquiring new credit accounts. For starters, your existing creditors may periodically check your credit history and if they note a poor credit rating they may choose to increase your interest rate on present accounts or lower your limit on your credit card. If applying for new credit such as a car loan, lenders may deny your credit application or charge a much higher rate due to adverse credit. Bad credit can also affect your employment options because some employers review the credit history of applicants and may pass on a candidate with poor credit.
Paying off Debt
The amount of debt you owe affects 30 percent of your credit score. Therefore, paying down debts (especially credit card debt) can reverse an adverse credit rating. Getting rid of debt is no easy task and it can take months or longer to put a serious dent in your balances. But paying more on the debt each month and avoiding new charges on your credit card helps reduce the debt more quickly.
Paying on Time
Better payment habits can also reverse adverse credit. Creditors send statements weeks before bills are due, which gives you ample time to send the payment. Opening statements early, recording due dates and budgeting your money allows you to meet this expense on or before the due date. A pattern of timely payments will increase your score slowly each month and get rid of a low credit rating.
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