If you have ever applied for a loan, you are familiar with the term credit score. Most lenders consider the creditworthiness of a person before giving out a loan.
The score uses FICO ratings that range between 300 and 850. It shows people who borrow and refund the money with interest on time, those that take longer to repay, and defaulters.
Bad credit is a problem that leads to more financial issues, including a poor record in the credit bureaus and difficulty in borrowing loans. It also leads to higher interest rates on loans, car loans, mortgages, increased rent deposits, makes it impossible to get credit cards, and costly insurance premiums.
You can get a poor credit score if you are the type that does not pay back loans. It is a problem that comes with different downsides, including higher interest rates, denied loans, and incurring high penalties
Therefore, a credit score of 670 and above makes loan institutions trust you with their cash. A fair creditworthiness score starts from 580 upwards to 669, while people with poor credit scores have 579 points or down to 300.
Having a low credit score of below 579, can have adverse effects on your financial life, including:
A poor score in your credit file in the credit bureaus
Everyone who has ever taken a loan probably has a credit file in the credit bureaus showing their credit history. Some of the credit agencies in the country that most lenders rely on when assessing your creditworthiness are Transunion, Equifax, Innovis, and Experian.
The credit reporting agencies collect credit and financial information of people to help lenders gauge if they can obtain a loan or not.
If your score in the credit agencies is low, it will affect you financially because you cannot get an emergency loan or money to meet immediate needs. Therefore, if you want to continue borrowing, you should avoid having a bad score in the credit bureaus.
Makes borrowing difficult
Another description of a poor credit score is the difficulty in getting a lender willing to give you the money to want to borrow. Lenders use your information, especially your ID number, to check if your history of paying loans is good or bad before they lend you the cash.
If your score is between 300 and 579, they shy away from you as a risky person for the business.
The lending organizations benefit when you pay back your loan with the accumulated interest, and bad debtors are a considerable risk to the survival of their business. Learn more from Freedom Debt Relief.
Cannot obtain credit cards
The low credit score makes it hard to get a credit card from lending institutions, such as a building society or bank. A bad credit score also makes it hard for one to get a credit card that comes in handy when you have no cash to purchase goods or services.
The cardholder can buy food, furniture, access recreational places, and even entertainment using the credit card in establishments where they are applicable.
The bank, credit facility, or any other financial institution that offers credit cards assesses your creditworthiness by checking your score.
If you have a bad score, you cannot get the card, which requires you to pay a monthly payment of the amount owed.
Lenders use the Fair Isaac Corporation (FICO) score to rate the creditworthiness of a person. The scores help lending institutions to assess credit risks. FICO considers several aspects such as payment history, types of credits, level of indebtedness, length of credit history, and new credit accounts.
When you ask for a loan, the bank or credit company uses the information in the consumer reporting agencies that shows your creditworthiness using the FICO Score. The lenders cannot lend to individuals with a score below 579 because it is risky and may seem like giving someone a gift that you can never ask back.
Increases your Interest rates
Furthermore, people with poor creditworthiness can access costly loans because of high-interest rates. Interest rates are the profits a bank or any other lender earns from any amount loaned out to consumers. The credit company that considers giving you a loan with poor credit ratings charges higher interest rates on your applied loan.
For instance, if you apply for a loan of 500 dollars, the institution can charge an interest of 50 percent on the amount, making it too expensive. A sane person cannot get borrowed money at that high-interest rate because it does not make sense to get 500 dollars and pay back 750 dollars.
Higher deposits on rent
Tenants with poor credit scores can also experience financial problems when moving into a new home. The landlord may request more deposits and might ask you to pay rent for more than one month to be sure you are not going to default on monthly rental payments. Therefore, a poor credit score can hurt you when you want to get a new apartment.
Costly mortgages or car loans
Having a low FICO score can also hurt your application for a mortgage if you wish to own a home in the future. The banks offering the mortgages can either deny you the mortgage depending on your poor creditworthiness or decide to charge you more interest.
The higher rates are the level of risk you pose to the company. The same applies to a car loan because no lending institution wants to give loans to someone that can default.
Higher Insurance Premiums
Poor credit ratings also imply that you are at risk of some insurance companies charging you higher rates. The increased rates due to your bad credit are associated with the risk of defaulting premium payments.
In a Nutshell!
Borrowers should keep their credit scores as high as possible by taking loans and paying them back on time without defaulting to have good credit scores.
The higher the FICO score in the consumer reporting agencies such as Transunion and Experian, the higher your chances of accessing a loan whenever you want because the lenders do not consider you a risky investment.
You will also get the borrowed amount at lower interest rates that you might consider reasonable.
A bad credit score is something to avoid because of the poor record you will have in the available credit bureaus, difficulty in borrowing loans, higher interest rates on loans, car loans, mortgages, and increased rent deposits.
The low credit score also makes it hard to get credit cards and increases the cost of insurance premiums. Therefore you should learn more from Debt Relief about effective debt strategies.