Developing a positive credit record has many advantages, with one of the most significant being that it can help you to save money. The consequences of having a low credit score are far-reaching; not only does it make it harder to take out loans, but it can also make it more difficult to find affordable housing, get affordable insurance, and even secure a good job.
It is important to be aware of the consequences of having a low credit score and the expenses that can be avoided by boosting one’s credit rating.
How Can One Recognize Bad Credit?
Beauty is in the eye of the beholder Though FICO has established numerical boundaries for various credit scores, some loan providers may have their own standards to assess whether a person has a low score.
FICO sets the credit score ranges. The credit score range as established by FICO is indicated as follows:
- 300 to 579 is considered bad credit
- 580 to 669 is considered fair credit
- 670 to 739 is considered good credit
- 740 to 799 is considered very good credit
- 800 to 850 is considered exceptional credit
If your credit score is lower than 580, it is usually seen as having bad credit. However, the opinion of certain lenders may vary according to their own assessment of credit risk.
What Are the Repercussions of Having a Low Credit Score?
The consequences of having a low credit score can be far-reaching and, in some cases, unexpected. The following are some of the most costly ways in which having a poor credit rating can have a financial impact.
Increased interest rates
When your credit score is low, it can be hard to be accepted for financing, such as a loan or credit card. If you do manage to get approval, you will likely have to pay a much higher rate of interest than someone with a better credit score. Personal loans for those with poor credit can be expensive, particularly when it comes to payday loans. Even with an installment loan that is paid back over a year, the interest rate can be quite high.
The gap between mortgage loan interest rates – say, 6% versus 4% – might not appear to be much initially. Nevertheless, over the span of 30 years, it could cost you a considerable amount of money if you are unable to refinance at a lesser rate in the future.
Costlier insurance rates
Most home and auto insurance providers rely on a credit-based insurance score to calculate policy premiums. Research has proven that individuals with a poor credit rating tend to file more insurance claims than those with a good or excellent credit scores.
Todd Christensen, an accredited financial counselor and education manager at Money Fit, a nonprofit organization that provides debt relief services, states that among many other risk factors, previous tickets and claims, age, gender, place of residence, and marital status are taken into account.
It’s not likely that a poor credit score will be the only justification for a rate hike, yet it can still prevent you from qualifying for a more favorable rate. Depending on the company, the circumstances, and other factors, leaving some money on the table annually is a possibility.
Certain financial services become unavailable
In order to qualify for certain financial products, it is necessary to have a good or excellent credit score. For instance, rewards credit cards, which can be quite lucrative with the potential of thousands of dollars in rewards and benefits, are usually not available to those with a bad credit rating.
Not having a rewards credit card does not guarantee that you will be paying more. However, by not taking advantage of the benefits they can offer, you are not as financially secure as you could be. You won’t be eligible for other offerings such as 0% APR promotional auto financing or unsecured personal loans.
Lost employment opportunities
For those who are employed in finance or the public sector, a credit assessment may be necessary for certain positions. Poor credit may indicate a financial vulnerability for those who are entrusted with money or possess a security clearance. Depending on the job and potential salary increase, having a negative credit report can be very detrimental.
In the majority of cases, a credit check is not a requirement for job applications in other industries, so whether or not it will have a bearing on your job search is uncertain. It’s impossible to work out exactly what the financial damage of a bad credit score will be, but in some cases, it can prevent people from achieving economic stability.
Why People with Poor Credit Ratings Pay More
In order to determine the interest rate for a loan or credit card, lenders employ a risk-based pricing system. Those with a good or excellent credit history are usually given the most favorable terms as they have demonstrated their capacity to pay off the debt in its entirety.
People with a history of poor credit may have difficulty in making payments on time. Consequently, lenders usually require a higher rate of interest to make up for the increased risk associated with providing credit to those with bad credit.
It’s not always the case that people with poor credit got there due to a lack of responsibility; life events like job loss, medical bills, or divorce can also negatively affect one’s credit. However, it is not possible for the majority of lenders to take into account each unique instance, so they have to depend heavily on your credit score and the details in your credit report without the full understanding of the context.
Learn how to read your credit report here.
Financial Institutions That Work With Individuals Who Have Bad Credit
It is important to note that just because your credit is poor, it doesn’t necessarily mean that your loan application will be refused. There are several financial institutions which specialize in accommodating individuals with bad credit.
It is important to be aware that the interest rates for these types of loans are typically high. Additionally, for auto and mortgage loans, you could be required to make a substantial down payment. As an example, OppLoans offers installment loans with an APR as high as 199%, making them a more appealing option than payday loans, but still expensive.
No minimum credit score is necessary to be eligible for a personal loan from OneMain Financial, although the highest APR is 35.99%. However, not all applicants will qualify and some may need to provide collateral as security for the loan.
If you are in the market for an auto loan, there are also numerous lenders who may be able to offer you financing. However, if you are trying to obtain a mortgage loan, it could be beneficial to work on increasing your credit score before applying or finding someone to cosign for you.
How to Boost Your Credit Score
To reduce the cost of having poor credit, focus on improving your credit score. This can not only provide lower interest rates, but also provide access to better financial products, housing rentals, or employment opportunities. Establishing a better credit history is possible by taking the following steps:
1. Evaluate your credit rating and review the details
Before taking any action, it is essential to identify where to direct your energies. A great starting point is to examine your credit score with a no-cost service such as Credit Karma or Discover Credit Scorecard. This will give you an indication of where you are currently at and enable you to follow your advancement over time.
By visiting AnnualCreditReport.com, you can access a free version of your credit report from all three of the major national credit reporting agencies. By having a copy of this report, you can evaluate it and identify the areas that need to be improved.
2. Search for incorrect data
It’s essential for individuals to look over their credit report periodically to guarantee that nothing inaccurate, unverified, or unfair is showing up and negatively affecting their credit score. If you come across an inaccuracy, you can file a dispute with the credit bureaus, who will collaborate with the creditor to verify the tradeline. Utilizing a credit repair company is an option as well, although it usually entails a cost for something that can be done without any expense.
Keep in mind that these options are only effective when dealing with incorrect, unsubstantiated, or unjust data.
3. Target problem areas
No matter the situation, there are certain credit issues that cannot be eliminated, such as a bankruptcy or foreclosure that has recently occurred. But you could still discover tasks that you can dedicate your attention to.
If any of your accounts have payments that are overdue, you could try to make them current as quickly as you can. Late payments will remain on your credit record for a period of seven years, but switching their status to ‘paid as agreed’ will have a big, positive impact.
To avoid having a collection account or a large balance on your credit card, it is advisable to pay it off as soon as possible. In order to identify the necessary steps to take, it is important to analyze your credit report to understand what needs to be done.
4. Look into a loan for building credit
Making progress in dealing with negative items on your credit report is critical for increasing your credit score, but it’s also essential to concentrate on creating a good credit record. One strategy to build credit is to get a credit builder loan. When approved, the lender typically stores the loan money in a savings or certificate of deposit account until the duration of the loan is completed and all payments are made.
When all of your payments have been completed, you will be granted the loaned funds with any accrued interest that has been gained during the duration of the loan. Utilizing a credit-builder account can be beneficial for constructing your creditworthiness as it allows you to demonstrate consistent, timely payments, which is the major factor in determining your credit score.
5. Opt for a credit card that offers secure protection
For those who don’t already possess a credit card, a secured credit card may be an option to consider. An initial security deposit is necessary, but these cards can help create a positive payment record if used regularly and payments are made on time every month. You can benefit from a secured credit card by earning rewards when you use it to make purchases.
Poor credit can be costly, but it’s not a life sentence.
A poor credit rating can be an expensive burden and may prevent you from obtaining fiscal stability and autonomy. Fortunately, it is possible to take action to enhance your credit score and provide yourself a fresh start.
It is difficult to prescribe an exact timeline for enhancing one’s credit score. While some activities, such as becoming an authorized user on another’s credit card or decreasing a credit card balance, can have a rapid effect on your score, others may take a few months to years to make a major impact.
Developing positive credit habits is essential not only for increasing your credit score initially but for maintaining it long-term.
Thank you for reading our article. We hope you learned new ways to battle creditors and banks while protecting yourself.
We would encourage you to become a member of HigherScoreNow.com and start to leverage all the benefits of having good credit. You deserve this.