A bad credit score can impact more than just your finances. Various financial institutions and companies use credit scores as a way to qualify individuals for services and opportunities. The cost of bad credit is substantial, but you can work towards improving your low credit score!
What Is a Low Credit Score?
In the world of finance, what exactly is a low credit score? Credit scores generally range from 300 to 850 points. As shown below, FICO divides credit scores into five categories based on numerical ranges.
- Poor Credit — 300 – 579
- Fair Credit — 580 – 669
- Good Credit — 670 – 739
- Very Good Credit — 740 – 799
- Excellent Credit — 800 – 850
A higher score is always preferable, but a good credit score is at least 670 points. A high credit score makes you appear more trustworthy to lenders and makes it easier for you to get approval. However, lower credit scores will make it more difficult for you to qualify for housing, loans, and large purchases.
How Does a Bad Credit Score Affect Your Life?
Your credit report is a direct reflection of your financial history. A bad credit score is one of the first details reviewed on a credit report. However, lenders will also check your payment history, loans, and credit lines. Unfortunately, poor credit can affect more than just your eligibility for loans. You could have trouble finding a new apartment to rent or qualifying for a new job.
Determines Qualification for Loans
People of various financial backgrounds apply for loans. You can live in one of the top cities for couples and still need a little financial assistance. But a poor credit score can make it challenging to qualify for loans due to limited options.
Creditors are often wary of working with people they consider high-risk borrowers. Individuals with a poor credit score and credit history often have to apply with multiple lenders before getting a loan offer—which can further decrease a credit score. But loan offers can be less than ideal for your wallet. You may want to get a few thousand dollars through loans like Mobiloans but may only get offered a small loan amount with high monthly payments.
Raises the Price of Bills
Various companies use your credit history as the basis for your payment plan. Your credit history includes phone companies, utility companies, and insurers. If your phone breaks, you may want to get a new one. But getting a new cell phone with bad credit and no deposit is challenging. Bad credit can prevent you from getting an affordable payment plan on the latest smartphone. If you receive a manageable payment plan, you will likely need to pay a larger security deposit.
Prevents You From Getting an Apartment
The cost of bad credit includes your dream apartment! Suppose you have found an apartment with everything on your list: parking, in-unit laundry, and no pet fee. You could lose out on that apartment if your credit report shows you have poor credit. If a landlord worries you may not be a trustworthy renter, they will consider other applicants.
Higher Payments for a House
If you are considering buying your first home, know that a poor credit score can make buying very costly. You will have to provide a larger Down payment and pay a higher interest rate if you lack a strong credit score. Lenders make it almost impossible for a person with a poor credit score to afford the cost of a home.
Ruin Your Relationship
The cost of bad credit may include your relationship since finances are essential for long-term partnerships. If only one partner has a strong credit score, this can strain the relationship. Two people in a committed relationship need to share the same outlook on money. For example, it’s hard to sustain a relationship when one party is frivolous with money while the other is more frugal.
Prevent Employment
Believe it or not, your current credit score can determine whether you get hired for that high-paying job. Employers have the right to run a soft credit check on applicants in most states. If the screening process shows you lack a good credit score, a potential employer could mark that as a red flag.
How To Improve a Poor Credit Score
The cost of bad credit is too high to ignore. Improving your poor credit score can make saving money easier since you can get lower interest rates.
If you apply for a $200,000 mortgage with a poor credit range of 620-639, your interest rate will be about 5.34%. Meanwhile, a good credit score range of 760-850 can help you get a 3.751% interest rate. That’s a total savings of $68,126 over 30 years!
If you currently have a bad credit score, rest easy knowing there are plenty of ways to achieve excellent credit. If you have patience and dedication, you can work towards raising your poor credit and improving your quality of life.
Review Your Credit Report for Errors
Your poor credit may be a result of a credit report error. Common mistakes include incorrect balances, incorrect payment dates, and incorrect accounts. By disputing errors, you could potentially fix a bad credit score.
Avoid Late or Missed Payments
Your payment history is one of the most critical factors regarding credit scores. If you constantly forget to make payments on time, that could result in a poor credit score. The good news is that many companies offer automatic payments and renewal options so you can avoid late fees and a decreased credit score. You can easily have payments for auto loans and quick payday loans deducted from your checking account.
Reduce Total Debt Amount
A high debt balance can prevent you from obtaining a strong credit score. Your credit utilization ratio is your total available credit divided by your debt balance. If you use more than 30% of your credit limit, you can damage your credit score. One of the best ways to get good credit is to decrease your credit utilization ratio.
Limit Your Loan Applications
If you apply for too many loans or credit lines, your credit score can be negatively affected. A hard inquiry, also known as a Hard credit check, lowers your credit by a few points. Excessive inquiries can result in poor credit. If you require emergency cash, apply for loans that offer flexible qualification requirements. For example, you can try applying for a personal loan with a direct lender.
To learn more about personal finance, and to answer important questions like “Is no credit better than bad credit?” check out the rest of our blogs in the CreditNinja Dojo!
References:
7 ways your credit score can affect your life
The True Cost of Bad Credit
How to Improve Your Credit Score
