What Is "Bad Credit?"

It may be that you shared an account or two with your spouse who had bad borrowing habits which affected your credit. Or it could be that you've gone through a bankruptcy or foreclosure process.

It can also mean having a low credit score. Credit scores can range from approximately 300 to 850, though that range may differ depending on which credit reporting bureau is computing the score since each uses different algorithms. Your credit score is affected by numerous things such as whether you pay your bills on time, whether or not you borrow a lot of money from numerous accounts, the amount of time you've been borrowing, and the types of credit you're using (eg. auto loan, mortgage, credit cards, etc.) The more negative marks you have on your credit report (such as late payments, bankruptcies, etc.), the lower your credit score.

How Can Having Bad Credit Hurt You?

Having a poor credit history or a low credit score can seriously affect you financially. One thing that can happen is that you could be denied credit. A low credit indicates to lenders that you are a high-risk borrower and they may not be willing to lend you money.

Another is that if you aren't denied credit, it may be more expensive for you to get credit. You may have to pay more in fees or with a higher interest rate which will increase your monthly payment. Loans of this type are known as "sub-prime loans." They usually come with a higher interest rate, but they can also help you consolidate debt and pay off some credit cards.

How to Improve Your Credit Score

Having poor credit is an uncomfortable subject for many. And in order to do something about it, you have to first acknowledge the problem. Don't lose yourself in a sense of denial. Once you accept that you're having difficulty, it's easier to take steps to improve your situation.

If you do nothing else, the three most important things you can do to improve your credit score are:

    * Stop using your credit cards-the more you use them, the easier it is to overextend yourself financially.
    * Pay off your debt-don't move it from account to account.

Lastly, if you're planning on buying a home or if you're a homeowner, work with someone. A good mortgage banker can be a great help in figuring out how to improve your financial situation and get you back on the road to better credit. Then, once your situation is under control, you can get a loan with a better interest rate and lower monthly payment.

Bad credit, poor credit or less-than-perfect credit-whatever you call it, it doesn't have to be the end of the world. Find out what your credit score is and what appears on your credit report. You'll be in a better position to know how to improve your situation. And if you can improve your financial situation, you'll become a better borrower able to qualify for better loans.