Good credit is important for many reasons beyond qualifying for the best loan rates. And the very first step in building it is knowing your starting point. But a NerdWallet survey finds that while more than a quarter of Americans (26%) check their credit scores monthly or more often, nearly 1 in 8 (12%) have never checked their scores.<\/p>\n\n\n\n
In an online survey of more than 2,000 U.S. adults, commissioned by NerdWallet and conducted by Harris Poll in April 2017, we asked Americans what they knew about the impact of bad credit, as well as factors that do and don\u2019t affect credit scores. Here\u2019s what we learned:<\/p>\n\n\n\n
About 40 million Americans have a FICO credit score lower than 600 [1<\/a>], and many might not understand the impact it can have on their everyday lives, even if they\u2019re not applying for loans or saddled with high-interest debt.<\/p>\n\n\n\n Having bad credit is expensive, and not just because of the high interest rates lenders charge. More than 2 in 5 Americans (43%) don\u2019t know that having bad credit can negatively impact the price of car insurance, and more than half (52%) don\u2019t know that it can negatively impact the cost of utility deposits. These expenses are often cheaper or nonexistent for those with excellent credit, even though they don\u2019t involve borrowing money.<\/p>\n\n\n\n Bad credit can even limit housing opportunities. Many landlords check applicants\u2019 credit reports, but almost a quarter of Americans (23%) don\u2019t know that having bad credit can negatively impact a person\u2019s ability to rent an apartment. And almost half (49%) don\u2019t know that bad credit can limit the ability to get a cell phone. Consumers with bad credit might be restricted to prepaid phones and miss out on carriers\u2019 best plans. It might even be challenging to get certain jobs with poor credit.<\/p>\n\n\n\n More than 1 in 5 Americans (21%) believe that a person with a credit score above 600 will qualify for any credit card he or she wants. Another 40% aren\u2019t sure if a score above 600 qualifies a person for any credit card. In fact, 600 is a below average score and won\u2019t give consumers access to most of the cards on the market.<\/p>\n\n\n\n Consumers with excellent credit have almost eight times as many credit card options as consumers with bad credit do. [2<\/a>] Those with bad credit miss out on the cards with the best rewards and lowest interest rates, as well as the best purchase protections and travel benefits.<\/p>\n\n\n\n Why do so many Americans have bad credit? Here\u2019s one possibility: Increases in the cost of living have outpaced income growth for the past 13 years, according to NerdWallet\u2019s annual household debt study<\/a>. Many consumers might be maxing out credit cards to bridge the gap and then falling behind on payments or defaulting.<\/p>\n\n\n\n Another theory is that Americans simply don\u2019t understand how credit works. Our survey found many misconceptions about credit scores, including the number of scores people have and the factors that go into them.<\/p>\n\n\n\n A credit score is a three-digit number, usually on a scale of 300 to 850, that estimates how likely someone is to repay borrowed money. If you make regular payments to a lender \u2014 on a credit card or auto loan, for example \u2014 you probably have credit scores.<\/p>\n\n\n\n More than 1 in 10 Americans (11%) think everyone starts out with a perfect credit score. Actually, you must build your scores from scratch<\/a> \u2014 but they don\u2019t start from zero<\/a>. Want to measure your progress? Your scores won\u2019t necessarily be listed on your credit report, although almost two-thirds of Americans (64%) think they are. The free credit reports available once per year from AnnualCreditReport.com don\u2019t include scores. However, you can get free scores from various sources, including NerdWallet<\/a>.<\/p>\n\n\n\n Five basic factors go into most credit scores: payment history, credit utilization, length of credit history, types of credit in use and new credit.<\/p>\n\n\n\n Payment history: <\/strong>One of the best things you can do for your credit scores is to make payments on time, 100% of the time. You\u2019re best off paying your entire credit card balance, but at least pay the minimum by the due date. Creditors won\u2019t report payments that are only a few days late to credit bureaus, but pay 30 days or more late and you can tank your scores.<\/p>\n\n\n\n Credit utilization: <\/strong>This refers to the proportion of your available credit you\u2019re using at any given time. Between 1% and 30% is ideal, but people misunderstand these numbers.<\/p>\n\n\n\n Possibly because using credit helps your scores more than not using it at all, more than 2 in 5 Americans (41%) think carrying a small balance from month to month can help improve a person\u2019s scores, while one-fifth (20%) think it can hurt it. In fact, whether someone carries a small balance probably doesn\u2019t affect his or her scores at all.<\/p>\n\n\n\n \u201cThe idea that you have to carry debt to have good credit is a dangerous, expensive myth that needs to die,\u201d says NerdWallet columnist Liz Weston, author of the book \u201cYour Credit Score.\u201d Carrying a balance will mean you pay interest, but it probably won\u2019t have any impact on your credit \u2014 just your wallet.<\/p>\n\n\n\n Length of credit history:<\/strong> This includes the total time you\u2019ve had credit \u2014 starting from your first credit card or loan \u2014 and the average age of all your credit accounts. It\u2019s a good idea to keep your oldest account open and avoid closing other older, unused accounts unless you have a good reason, like they charge annual fees or you need to shed a joint account. If you do choose to close other accounts, keep length of credit history in mind to limit the negative effect on your scores.<\/p>\n\n\n\n Mix of credit accounts: <\/strong>Having a mix of account types doesn\u2019t have a large impact on credit scores, but it might be helpful to have both revolving accounts, such as credit cards and lines of credit, and installment loans, such as mortgages, auto loans or student loans. You can build and maintain good credit with just one type of account.<\/p>\n\n\n\n New credit: <\/strong>The final factor concerns the number of new accounts you\u2019ve opened or applied to open. When you apply for a credit card or loan, a \u201chard\u201d inquiry appears on your credit file. Checking your own scores results in a \u201csoft\u201d inquiry that won\u2019t hurt your credit. But hard inquiries aren\u2019t great for your scores, so you\u2019ll want to limit the number of applications you submit.<\/p>\n\n\n\n The exception is when you\u2019re \u201crate shopping<\/a>\u201d for a mortgage or auto loan. In these cases, it\u2019s smart to apply at several different lenders to get the best rate. The credit bureaus count multiple inquiries as a single inquiry as long as they\u2019re made within a certain time frame, usually a few weeks.<\/p>\n\n\n\n Improving your credit means working on the five factors above. However, you also might be able to improve your credit by catching mistakes on your credit reports. Most consumers have one at each of the main credit bureaus: Experian, TransUnion and Equifax. You can obtain each of these reports for free once per year<\/a>.<\/p>\n\n\n\n Once you receive your reports, read each one closely<\/a> and dispute any errors<\/a>. Incorrect information could hurt your credit, denying you access to low loan rates, superior credit products and other benefits of good credit.<\/p>\n\n\n\n People trying to build credit commonly run into a catch-22: They need a loan or credit card to increase their scores, but they can\u2019t get approved for a loan or credit card because their scores are low or nonexistent. For example, it\u2019s hard to find good credit cards for bad credit<\/a>.<\/p>\n\n\n\n Those with poor credit have a few options:<\/p>\n\n\n\n Credit-builder loans<\/a>: <\/strong>These loans typically have low interest rates, regardless of your credit scores. But there\u2019s a catch: You don\u2019t receive the money from the loan until you pay it off. These loans exist solely for the purpose of building credit. The lender puts the money into a savings account, and you can claim it once you\u2019ve paid the balance in full. The bank will report your payments to the credit bureaus, which should help your scores, provided you\u2019ve made all the payments on time.<\/p>\n\n\n\n Secured credit cards<\/a>: <\/strong>With a secured card, you put down a security deposit that\u2019s usually equal to the card\u2019s credit limit, but sometimes is less. This reduces the issuer\u2019s risk. Not everyone who applies for a secured card gets approved, but they\u2019re still a good option for those with bad credit.<\/p>\n\n\n\n Secured cards aren\u2019t prepaid, so it\u2019s critical that you pay off your charges each month. After \u201cgraduating\u201d to an unsecured card or closing the account in good standing, you\u2019ll get your deposit back.<\/p>\n\n\n\nThe everyday effects of bad credit<\/h4>\n\n\n\n
Bad credit means fewer credit card choices<\/h4>\n\n\n\n
Misconceptions surround credit scores<\/h3>\n\n\n\n
What\u2019s a credit score?<\/h4>\n\n\n\n
The components of a credit score<\/h4>\n\n\n\n
How to improve bad credit<\/h3>\n\n\n\n