A payday loan is often a quick and simple solution for people with a bad credit score, who need to borrow a small amount of money in order to see them through until their next pay check comes in. But what does the term ‘bad credit’ actually mean and how do you find out if your credit is bad?
In order to answer this question we first need to establish exactly what a credit score is. The term credit score, also known as a credit rating, is a measurement of how well or how badly you have re-paid credit in the past. This score will either leave you rated as bad, fair, good or best and will be based upon a numerical score, which is usually measured from 300 to 850.
Lenders use your credit score to decide whether or not they will lend to you and, if so, how much interest they will expect you to pay. If your credit score is low and therefore considered to be ‘bad’ a creditor will either refuse to lend to you or will offer you a loan with a very high level of interest. If you have a high credit score which is rated ‘best’ then you shouldn’t have any problem at all obtaining credit and you will have the lowest level of interest to repay.
If you have been late on making creditor re-payments in the past or if you have missed payments altogether then this will damage your credit score; as will anything listed on your file such as a Money Judgement or Bankruptcy.
Typically lenders who insist on carrying out a credit check are those who are lending on either an unsecured or secured basis, rather than those who are offering payday loans. Because of this, the payday loan industry has become increasingly popular – especially as more and more people find that they are struggling to save any money for financial emergencies.
A good way to find out about your credit score is to join a credit scoring website, such as FICO. You can usually get a free 30 day trial as a new member and after this you would need to pay a monthly subscription charge. By having an indication of what your score is you can begin to work on improving it a little bit at a time. This is also a good way to check for any mistakes on your report. Mistakes and mix-ups don’t often happen but when they do you will want to ensure that they are rectified so that they have no bearing on your actual score.
A good place to start when looking to improve your credit rating is to ensure that any credit you have outstanding is either paid off, on time, by making the agreed regular monthly instalments or alternatively paid off in one go in order to eliminate the credit. Approximately two thirds of your score is based upon how well you can meet your re-payments and how much you owe overall.
Possibly the worst thing that you can do is make only the minimum re-payment each month. This would highlight to potential creditors that you are not serious about paying off your credit or that you do not have the means with which to do so. By reducing your balances you will have a better chance of obtaining credit in the future with a lower rate of interest.
Applying for lots of credit in one goes – even if it’s only for retail store cards – can also be damaging to your overall score. This suggests to the creditors that you are desperate and that other lenders may have turned you down for the credit. In turn this creates an air of uncertainty and distrust and future potential lenders may reject your requests based upon this.
Included within your credit score will also be any debts that have been passed over to collection agencies and can consist of library fines, traffic and parking tickets. Therefore, make sure that you pay off any fines that you receive as quickly as possible so that you can avoid this eventuality.
Ultimately, improving your credit score can be a slow and steady process, but the sooner you start to build it up the sooner you will be able to enjoy more choice regarding credit lending in the future.