Many people take applying for finance for granted but for some, getting approval for credit can be a difficult affair.
However, credit, in one form or another, is available for most people and even those who have experienced financial difficulties in the past may still be eligible for a credit card. In such instances, rather than a mainstream card, a more specialised type of account is likely to be offered, such as bad credit credit cards.
Bad credit credit cards are an undoubted advantage for those who have been unable to secure finance in the past, but many charge a much higher rate of interest, making it a more expensive option to borrow money.
The FICO method takes into account several factors in the credit file and provides an overall score for the individual, giving lenders an idea of how risky lending money would be.
Anyone who has either had financial problems in the past, or conversely, has no experience of credit, is likely to have a low score, meaning that either credit will be refused or a higher rate of interest applied.
The good news is that it is possible to improve a credit score. The bad news is that this takes time and attempting to rush the process along will not help matters at all.
The FICO scoring system takes into account not only what problems there have been in the past, but also the types of credit on an individual’s file.
Someone who has different types of credit will score more highly than someone who has few or restricted types of finance.
One of the other factors considered is the amount of credit being utilized. Some people think that it is important to close down any unused cards and it is true, lenders do consider the total amount of credit that would be available if all loans, overdrafts and credit cards were maximised.
However, this is not the only thing which is taken into account The amount of spare credit on a card is also calculated. Individuals close to their credit limits on one or more account can be viewed as a poor risk, because the indications are that they may be in money difficulties and are maxing out their credit.
Lenders tend to be particularly interested in patterns of behaviour and will view with caution any changes. For example, an individual who has recently opened several credit accounts will be scrutinized far more closely than someone with the same number of accounts that have been taken out slowly over the years.
Before considering applying for credit, one of the smartest things to do is check your own credit file. Every American is entitled to a free report each year from the major credit agencies and it is wise to take advantage of this offer to check for inaccuracies.
Anyone experiencing financial difficulties should also consider discussing their finances with a credit counsellor. Simply seeing a counsellor will have no impact on your credit file and can help prevent further problems from developing.
If at all possible, catching up with any missed payments and staying on top of the bills is a good idea, as this will ultimately be the one thing which improves a credit score the fastest.
The exact method of calculating the FICO score has never been disclosed, but the previous payment record, along with current repayments, are viewed as one of the most important indicators. Whilst shopping around for finance does lower the score, the impact is only slight and unlikely to make a significant difference.
