The credit score is a 3 digit number, typically in the range of 300 to 850. At the low end 300 means you have very bad credit and would be unlikely to receive a loan, and on the other end of the scale a credit score of 850 would have the lender salivating at the opportunity to loan you a heap of money.

Although there is no hard and fast rule about the way the credit score is calculated (and indeed many institutions have their own formula’s which are adapted from the standard way of calculating) here is a general guide to how it is determined (these figures are approximate).

35% of your score will be based on how on time your payments are (or how late they are/have been).

30% of your score will be based on the total amount of debt you currently have versus how much available credit you have. You would add up the total balances of all your debt to get the first figure, and then add up the total credit limits of your cards, and other loans to get the second figure.

15% of your score will be based on the amount of credit history on file.

10% of your score will be based on the type of credit (this area is a little vague and can be adapted by each lender).

10% of your score will be based on the amount of credit recently obtained and/or the number of recent applications for credit.

Again, these figures are a rough guide and there would also be a number of overrides built into the systems by each lender. For example if you had a number of very overdue payments this could drop your score well over 35%. Also things like bankruptcy, foreclosures, and judgments would dramatically decrease your score.

There would normally be a process where the lender would enter your details into their computer system and if the score came out lower than the minimal they have decided on for a particular loan, your application would get rejected.

When considering a poor credit home loans; we suggest you do some careful research first.
So what can you do to improve a bad credit rating?

1. If not already doing so, ensure you are making all payments on time, or even a little early. Paying a little extra can also help in some cases.

2. Get any judgements you may have on your credit report for unpaid accounts sorted out. Either pay the account, which will in some cases get the item removed from your credit report (if it is not removed, at least the lender will see that it has been paid), or double check it is correct (sometimes incorrect information gets put onto your report). It is sometimes possible to get your credit repaired by using a credit repair company. Be sure to do your homework and find reputable companies.

3. Cut down the amount of applications you are making for credit.

4. Consolidate your debts. For example if you have three items of credit, get rid of two of them, and just use one.

Or get the credit limits reduced on your credit cards. Sometimes a lender will look at the total amount of credit you have available and decide not to loan you money because that number is two high! Reducing your credit limits on each card, or reducing the number of cards would assist here. Unfortunately this can sometimes work against you as well, if the lender believes you have done this purely to obtain the loan.

5. Savings – Sometimes, showing a decent amount of money you have saved over a period of time will give the lender confidence in your ability to manage money.

6. If you have overdue accounts now, get them current now, and contact your creditors immediately to discuss – Don’t wait till the situation gets worse.

The problem of a bad credit rating does not go away quickly of it’s own account (generally an item on your credit report can last up to seven years), so prevention i.e. the best cure is paying your accounts on time.

If you are stuck with a bad credit rating now and need a loan, there are bad credit lenders who specialize in lending funds to people in your situation. Usually you will pay a higher interest rate but this can be an excellent way to start improving your credit score.

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