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Bad Credit? Time For Tough Love And No Excuses

Quick, what's your credit score? Don't know? Don't care? You should. If you've been turned down for loans or received high interest rates from lenders, your credit may be, well, bad. The good news? You can fix it. You really can. But there's no magic formula. There are, however, some concrete steps you can take to turn your credit situation around. Begin by understanding what contributes to your current score and follow the four steps outlined below to change course.

"What is bad credit, anyway?"

Bad credit means that you have negative items or limited entries on your credit report resulting in being on the lower end of the Fair Isaac Corporation (FICO) Credit Score scale. FICO is the U.S. standard banks use to measure a person's creditworthiness. Your credit report consists of entries from lenders saying you have paid your bills on time, how long your account has been open and other information about your account. When you apply for new credit, such as a credit card, the potential lender looks at your credit report to see how you have behaved with other lenders. The point range is 300-850, with 300 being the lowest score. Credit scores below 620 will generally find it more difficult to obtain loans at favorable rates.

"Yeah, my score is low. But who cares? It's just a number."

A lower score indicates to lenders that you are a credit risk -- you may not pay back the money you have borrowed. In order to offset the potential loss that a lender may incur by lending to you, the rates and fees offered to you are typically higher than those offered to people with good credit scores. That means, for the same purchase, you may be paying more than someone with a higher credit score. For example, a landlord may charge you a larger deposit in order to rent an apartment or, if you carry a balance on a credit card, your interest charges are higher.

Because building a good credit score requires a history of timely debt repayment, a good credit score indicates to lenders that you are likely to repay the money you borrow. As desirable customers, those with high credit scores are offered the lowest interest rates on different types of loans including automobiles, homes and credit cards. Potential employers may also view your credit report, however, employers do not check credit scores.

"Why do I have a bad credit score?"

There are a variety of reasons why you could have a low FICO credit score. Some of these reasons will lower your score more than others. You may have one or more of the following factors:

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