The Ways a Bad Credit Score Can Get in Your Way
A bad credit score means getting locked out of credit facilities, among other inconveniences. Let’s see exactly what's a bad credit score and ways to fix it.
June 9, 2022
A bad credit score can effectively lower or even prohibit you from obtaining a new credit line from major banks and non-banking financing firms (NBFCs) that are unwilling to accept consumers with a damaged credit history. We take a look at what a credit score is, some of the most serious consequences of having a poor credit score and what you can do to improve it.
What is the Significance of My Credit Score?
The information in your credit report is used to create your credit score, which is a three-digit number ranging between 300 and 850. A creditor may consider your credit score when you apply for a new line of credit to determine:
If you can afford to pay back a loan.
Your creditworthiness, or your capacity to repay debts on time.
Causes of a Poor Credit Score
Some of your daily habits may result in a poor credit score, such as:
Submitting several loan applications in a short amount of time
Applying for several loans in a short period of time may give the appearance that you are in desperate need of cash. When each of these lenders makes a hard credit inquiry to credit reporting organizations, the specifics of the query will be reflected in your credit report. Numerous inquiries in a short amount of time may damage your credit score.
Overspending on your credit card
The usual rule while using credit cards is to keep the utilization ratio between 10% and 30% of the available credit limit. Exceeding the 30% limit could indicate that you are overly reliant on your credit card, which in turn can lower your credit score.
Late or missed payments
Your payment history heavily influences your credit score. A 30-day late payment could lower your credit score significantly. After 180 days, it will be considered a payment default, which could have a number of long-lasting consequences.
Negative account details
Your credit report will include information about bankruptcies, foreclosures, charge-offs and repossessions, if you have any. Any of these can negatively impact your credit score over time.
Ways a Bad Credit Score Can Affect Your Life
You might have a difficult time finding work
Many occupations, particularly those in senior management or the financial industry, have certain requirements that applicants must achieve, including having a good credit score. Because of your spotty credit history, you may find it more difficult to get the job you want, especially if you have large debts or a history of bankruptcy.
You may pay high interest rates
If you are approved for a loan, you are more likely to be offered a higher interest rate than if you had a better credit score. Because lenders consider people with bad credit to be risky, they'll make you pay more for a loan by tying your loan to a high interest rate. The higher your loan's interest rate, the more you'll pay toward interest rather than principle throughout the course of your loan's term.
Getting approved for an apartment will be more difficult
If you have bad credit, the landlord may be less likely to approve a lease, preferring instead to rent to a tenant with good credit. Landlords — like insurance companies and banks — assume that applicants with bad credit are more likely to fall behind on their monthly payments, consequently putting them at greater financial risk.
You could pay higher insurance premiums
Insurance companies claim that lower credit scores are linked to an increase in the number of claims filed. This theory leads them to investigate a person's credit history. If they discover that you have a low credit score, you may be charged a higher premium regardless of how many claims you have filed.
Your loan applications may be denied
Lenders and creditors view borrowers with poor credit as high risk, so they may be less likely to lend you money. Whether you're looking for a mortgage, an auto loan or another type of credit, your loan applications may be denied.
Repairing Bad Credit
If you do nothing, the rating on your credit report will likely recover after about ten years, but it is possible for you to speed things up by minimizing damage as it happens and then taking action to build your credit. Here are some ways to get started.
Examine your credit report
Knowing what's on your credit report will assist you in determining your specific situation. Your credit score can provide an indication of your creditworthiness. However, your credit report might provide far more information.
Requesting a free annual credit report from each of the three major credit bureaus, TransUnion, Experian and Equifax, is an excellent place to start. If there are inaccuracies on your report, they may have a negative impact on your credit score. However, you have the right to dispute any inaccuracies or errors on your report.
Pay past-due bills
If you have payments that were not paid on time and are now past due, catching up on those can have a positive effect on your credit score. And if you're behind on your credit card payments, you might consider contacting the card issuer and ask about setting up a payment plan.
Pay your bills on time
Your payment history is a major influencer of your credit score. Negative information in your payment history, such as missed or late credit card payments, can have a long-term impact on your credit score. Missed payments may also result in other penalties, such as late payment fees.
However, earlier late payments may be weighted less than more recent on-time ones. So, the longer you pay your payments on time, the better your payment history will be. And the better your credit score will be.
Set up a budget, automated payments or reminder alerts to help you stay current on your bills. Making the minimum payment on credit accounts, such as your credit card, keeps your accounts current and in good standing. However, paying just the minimum amount due may mean making payments for a longer period of time, increasing your overall interest cost.
Think about getting a secured credit card
A secured credit card may be beneficial as you work your way toward a higher credit score. You can use it to make purchases exactly like a standard credit card. However, it is called "secured" because it requires a security deposit to open the account, and that becomes your credit limit.
As long as your credit card issuer reports your payment status to the credit bureaus, a secured credit card can benefit your credit history. Using your card responsibly and paying your minimum payment on time may help you improve your credit.
Obtain authorized-user status
If you have a loved one or someone you trust who has a solid credit score, you might consider asking to be added to their account as an authorized user. You can make purchases with the card, but the primary account holder is ultimately liable for payments.
Using an authorized card responsibly can help you develop credit and improve your score. Furthermore, there is usually no credit check or application required to become an authorized user.
Check with the credit card issuer to see how they handle reporting authorized users' payment activity to credit bureaus.
It’s better to research the question of “what's a bad credit score” before you have one. Improving a credit score takes time. The length of time it takes to rebuild your credit is affected by your current credit score, your credit history, and how you handle credit going forward.
The good news is that most items will not have an indefinite impact on your score. The effects of negative variables may diminish over time. Being patient and developing healthy financial habits can pay off in the long term.
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