A good credit score can benefit you in many ways. Better loan products, premium credit cards, and favorable interest rates – you can have access to all of them with a good credit score. On the flip side, if you get a bad credit score, it can have an adverse effect on your personal, and financial life. Some of the consequences of bad credit history could be having to miss out on the best deals. Or, you may have to pay high interest on loans, credit cards, and mortgages. Or you not being able to avail credit during emergencies.
As per FICO, a credit score in the range of 300 to 579 puts you in the poor score category. And VantageScore adds you to the bad credit score category if your credit score is between 300 and 500.
READ MORE: What is a low credit score?
Let’s understand what happens if you have bad credit.
What are the Various Side Effects of a Poor Credit Score?
A bad credit score can land you in a financial mess. Here are some side effects of a bad credit score:
Paying high-interest rates on loans and credit cards
Credit scores serve as indicators of your financial well-being. And, lenders depend on your credit scores to know how likely you will clear your credit card dues and loans.
Having a poor credit score suggests that you are a riskier borrower as compared to a person with a better credit score. To offset this risk, you may be charged a higher interest rate, which is one of the main disadvantages of a bad credit score.
Getting your credit application rejected
Creditors are mostly ready to take a certain amount of risk. However, if your credit score is very low, they may not be willing to lend you. Hence, one of the disadvantages of a bad credit score includes the high probability of your credit applications getting rejected.
Facing difficulty renting an apartment
Keep in mind that landlords check your credit score before they approve your rental application. This means that you may not be able to rent an apartment if you have a bad credit score. Also, if any landlord is willing to rent to you despite your poor credit score, one of the side effects of a bad credit score could be that they will take a higher security deposit.
Putting in security deposits on utilities
Before accepting your applications for utility connections, utility companies (such as cable, phone, and electricity ones) will check your credit standing. Moreover, among other disadvantages of low credit score could be that you may have to pay a security deposit upfront before they sign you on.
Having a bad run when looking for a job
As you learn more about what are the effects of poor credit, you will also know how a poor credit score affects your professional life. This applies more to higher management jobs in the finance industry where having a good credit history is mandatory.
One of the consequences of bad credit history could be that your job applications are turned down. Bankruptcy, outstanding bills, and mounting debts are among the negative items on your credit report that can dampen your job prospects.
Spending more on insurance premiums
By studying your credit score, insurers reckon whether you are a risky borrower or not. They have their credit-based insurance scoring models to help calculate your insurance premium. As always, you can get a low rate on insurance plans with good credit. Conversely, one of the effects of poor credit includes paying a high rate on insurance policies.
It is also important to remember that your credit score is not the only factor that decides your premium rate. There are several other factors that insurance companies consider.
Now that you know what happens if you have a bad credit score, you may require some tips on improving your credit score.
ALSO READ: Consequences of a bad credit history
What are the different ways of improving your credit score?
After studying about what are the consequences of having bad credit, let’s move on to how to improve your credit score.
- Learn about your credit standing; get your credit report to know about it
- After you get your credit report, study all points carefully. Look for any incorrect details, and if needed, contact the credit bureaus to make any corrections
- Making payments on time is mandatory to boost your credit score. Remember your payment history constitutes a major chunk of your credit report and your credit score goes down because of payment defaults
- Keep your credit utilization rate at the ideal 30% mark. To do so, you have to start paying off your revolving debt, including your credit card dues
- Consider becoming an authorized user of a family member’s credit card. It’s important to have a trusted partner in this case because the account owner is liable to pay the dues
- Apply for a secured card,which requires you to deposit money into an account. Based on the deposit amount on your secured card, your credit card limit is determined. Secured cards help to improve your credit score because they report your payment history to credit reporting agencies. Ensure to have a positive payment history when taking a secured card. For only then you can improve your credit score
There are many disadvantages of a bad credit score and a poor credit history has far-reaching consequences. Among these, it may lead to high-interest rates and lesser loan options. In addition to that, you may find it hard to find a house and obtain other services. Besides, it could go against you when looking for a job. To deal with these issues, check out the Zolve Azpire Credit Builder Card, which can help you fix your credit score without any additional hassle.
So, start by studying your credit report and taking remedial measures today!
Frequently Asked Questions
Does each person have only one credit score?
Do not believe any such claim that says each person has only one valid credit score. The fact is that there are many credit scoring models that lenders apply (this figure goes up to above 1000). But it should be noted that the parameters based on which credit scores are calculated are more or less the same for most of the credit scoring models.
What information goes into calculating a credit score?
Credit scoring agencies study three main areas of your credit report: account information, public records, and inquiries. Under account information, mortgages, auto loans, credit cards, and rental agreements are included. Among public records, you will find details about bankruptcies and judgments. The inquiries section has been requested by lenders to obtain your credit history.
Details about marital status, gender, race, and house are omitted in credit reports.
What is a good credit score?
A good credit score may vary from model to model. However, in general, a credit score of 670 to 739 is considered good, 740 to 799 is considered very good, and a score above 800 is considered an excellent credit score.
Does a bad credit score impact the interest rate of a loan?
Yes, a bad credit score directly affects lending rates. A bad credit score implies you are a risky borrower. This means that there is a possibility of failed repayment. This risk is cushioned by charging a higher interest rate on your loan or credit.
Is there any correlation between a bad credit score and employment?
Many times employers check the credit score of their potential employees in order to understand their solvency and current debts. If you have a bad credit score it is an indicator to the employer that your financial management is not up to par, which may cause some hassle in getting a job.