If you live paycheck to paycheck more than likely you also make a few late payments throughout the month and even possibly miss a payment here and there. Unfortunately, this way of living drastically affects your credit score. Making payments late or missing one and then doubling up the next month can cause your score to go down considerably, and put you unfavorable to lenders.
The Real Cost of Bad Credit
By now you probably know that having a bad credit score can deny you homeownership, prevent you from purchasing a new car and acquire any new form of credit. However, what you may not realize is that your credit score costs you a lot of money in other ways too. When you move into a new dwelling and need to have the utilities turned on, they check your credit first and then tack on a deposit if the score is poor.
Before hiring, many companies now check your credit score to see if you are a responsible person and some companies, like those who deal with insurance, flat out deny you if you have a poor score. Luckily, there are companies who specialize in providing insurance for people with bad credit, so you will be able to ensure your home and auto, but you won’t have access to the best rates.
Determining Your Credit Score
There are five categories that determine your final FICO score. The three that matter the most, with the higher percentages, are your payment history, your utilization and the length of your credit. Together they make up roughly 75%. Since 35% alone is your payment history, even one marked late can lower your score considerably. How you use your credit is also very important, as it determines 30% of your overall score. If you have many credit cards with high balances this will place you as a high risk to lenders.
Way to Improve Your Credit Score
The good news is that anyone can improve their credit score. For instance, having too many credit cards with high balances will reduce your score. So, a way to raise your score is to lower the balances to less than 30% of the available credit and then cancel a few of the cards that have the highest interest rate. Since, your length of history, established credit, counts as well, when deciding to cancel a few cards, make sure they are the newest. Of course, the biggest single factor in determining your score is how you make your payments. So, in addition to reducing your existing credit card balances, and canceling a couple of cards, you also need to make your payments on time.
Finding the Resources to Reduce Your Debt
In order to raise your credit score to good standing, you will need to reduce your debt so that you can continue to make timely payments going forward. One way to achieve this is to take out a consolidation loan, through your bank or refinance your mortgage. If due to your low credit score your bank is unable to offer you a loan, you can borrow the money from a retirement fund, such as your 401K, or ask a family member for a loan.
Making Changes to Your Lifestyle
Mishandling of money often turns up as the source for living paycheck to paycheck. It’s easy to get caught up in the “I want” cycle because there’s money in the bank. However, if you spend everything you make, then when something comes up that you also have to tend to, you won’t have the money to pay for it. This is why it’s important to keep track of your spending and learn to save money for things like a vacation, your retirement, and a few luxury items you want.
Having a good credit score makes it easy to afford a comfortable lifestyle. Use these tips to help your score stay in tip-top shape!