Damaged Credit Rating

A credit score is a number used by lenders to determine a borrower's ability to repay money. Credit scores are determined by evaluation of information provided to credit agencies primarily by lenders. A bad credit score can make it extremely difficult and expensive to receive a loan, if not entirely impossible in some cases. Once a credit score is damaged, however, it can be repaired.

Credit Scores

Credit scores are numbers provided by a number of institutions that are used to gauge a borrower's ability to repay money. There are several different credit rating agencies, meaning that every borrower likely has more than one credit score. The most popular credit score is known as the FICO score and ranges from 300 to 870, with 870 being the highest score.

Components of Credit Scores

Credit scores take a variety of factors into account. These include payment history, outstanding debt, length of credit history, recent credit inquiries and type of credit outstanding. The two most important elements of the credit rating are payment history and amount of outstanding debt. Individuals who have struggled or failed to make payments in the past or have a great deal of outstanding debt, therefore are likely to have very low credit scores.

Effects of Poor Credit Scores

A poor credit score will at the very least mean higher interest payments for borrowing money. Lenders will assume that individuals with damaged credit expose the lender to a great deal of risk of default and that they must be compensated for that risk with higher interest rates. If a potential borrower's credit score is low enough, he may be unable to find any lender willing to risk money on a loan to him. This can be particularly difficult for first-time home buyers.

Repairing a Damaged Credit Rating

While a damaged credit rating can be very detrimental to an individual's finances, it is far from permanent. A damaged credit rating can be repaired over time, primarily by consistently paying off outstanding debt. A credit score can be thought of as a snapshot of an individual's ability to repay debt at a particular period in time. The same individual struggling to pay off $100,000 in student loans and other debt at age 23 might be virtually debt-free with a high paying job at age 40.