What does it mean to have a bad credit score? This is a question that often crosses the minds of many people. Well, it is important to first define what bad credit is. Bad credit refers to a person’s history of paying debts late, as well as the possibility that they will continue to do so in the future. A poor credit score frequently indicates it. Besides people, companies can also have a poor credit based on their payment history and present financial status.
A person (or business) with poor credit may find it challenging to borrow money, particularly at competitive interest rates, since they are viewed as riskier borrowers. This is true of both secured and unsecured loans, although there are choices for the latter. It is not the end of the world to have a low credit score as long as you try to improve it.
There are actions you may do to improve your credit score, despite the fact that poor credit may make it more difficult to attain certain financial goals, such as obtaining a car loan or mortgage.
When assessing if you qualify for credit, for instance credit cards or loans, creditors meticulously examine your credit record. Your credit score is considered as one of the factors. Examining your financial behaviors, such as your debt and payment history, in order to estimate your capacity to repay a loan, derives this three-digit score.
If your credit score is less than great, you should take immediate steps to improve it and raise your chances of being accepted for financial goods such as credit cards and loans.
What is a Bad Credit Score?
Credit score ranges vary dependent on the credit scoring algorithm adopted (FICO versus VantageScore) and the credit agency that pulls the score. You may determine which credit score range you fall into using the table below. Take heed that the credit score used by lending institutions varies, however 90% use the FICO score.
FICO Score
• Very poor: 300 to 579
• Fair: 580 to 669
• Good: 670 to 739
• Very good: 740 to 799
• Excellent: 800 to 850
VantageScore
• Very poor: 300 to 499
• Poor: 500 to 600
• Fair: 601 to 660
• Good: 661 to 780
• Excellent: 781 to 850
What Aspects Can Influence Your Credit Score?
Depending on the scoring model, credit scores are calculated differently. Here are the primary factors considered by FICO and VantageScore.
FICO Score
• Payment history (35% of your total score): Whether prior credit accounts have been paid on schedule.
• Amount owed (30 %): The entire amount of credit and loans you’re utilizing relative to your overall credit limit, often known as your usage rate.
• The duration of your credit history accounts (15%).
• How frequently you apply for and open new accounts (10 %)
Credit mix (10 percent): The assortment of credit products you possess, such as credit cards, installment loans and home loans, among others.
VantageScore
• Extremely influential: payment history
• Highly influential: credit type, length, and credit limit use
• Moderately influential: Total balances/debt
• Less influential: Credit availability, recent credit behavior, and queries
Disadvantages of Having a Bad Credit
So why is it such a huge deal to have a poor credit score? Numerous entities, including loan officers, enterprises, and insurance firms, examine your credit history before taking action. According to experts from Freedom Debt Relief, your poor credit score might prevent you from being approved for a loan, obtaining employment, or even finding a place to live. Here are six negative consequences of having bad credit.
Your Loan Applications Could Be Rejected
Poor credit is viewed as a high risk by lenders and creditors; therefore they will be less reluctant to offer you the money you need. Whether you’re seeking a mortgage to purchase a home or a car loan to finance a new vehicle, your loan applications may be declined.
You will be charged high interest rates
If you are accepted for a loan, you will likely be saddled with an extremely high interest rate. Since lenders view borrowers with low credit as a risky investment, they will attach an exorbitantly high interest rate to your loan. The greater the interest rate on your loan, the more you will pay in interest over the life of the loan rather than the principal.
You Will Be Required to Pay Greater Insurance Premiums
Even insurance firms examine credit histories. They assert that lower credit ratings are related with an increase in the number of filed claims. This hypothesis drives insurance companies to investigate a person’s credit history. If they discover that your credit score is subpar, you will likely be charged a higher rate, regardless of how many claims you’ve submitted.
You Might Have Difficulty Securing Employment
A solid credit score is one of the requirements for many employment opportunities, notably those in senior management or the financial business. You may find it much more difficult to obtain the employment you desire if you have a poor credit history, especially if you have excessive debt amounts or a history of bankruptcy.
Starting a Business May Present Difficulties
With a poor credit score, not only will it be harder to get a work, but it may also be tough to launch your own business. Many fledgling firms require a bank loan to get off the ground. Even if your company plan is brilliant, banks will be less inclined to approve your loan application if you have a bad credit score.
It will be more difficult to be approved for an apartment.
Even landlords do credit checks on prospective renters. If you have bad credit, the landlord may be less reluctant to sign a lease with you, and may instead give it to a renter with good credit. Similar to insurance firms and banks, landlords assume that persons with low credit are more likely to be overdue on their monthly payments, hence increasing their financial risk.
What does it mean to have bad credit?
The repercussions of having low credit may be far more extensive than you anticipated. Your best chance is to do everything possible to restore your credit.
Concentrate on improving your payment history and reducing your debt. These are the two most significant contributors to a low credit score. Focus on getting past dueinvoices current and reducing outstanding sums. Continue making payments on all of your debts while concentrating on the larger ones.
