All posts by Terence

What is bad credit and how does it affect you?

People tend to get edgy when it comes to applying for a loan. The most decisive part for your loan procedure is your credit score. Your credit score is calculated from your credit files and is based on your history of dealing with borrowed money. The credit score is used by the lenders to evaluate their risk in borrowing money and to determine the chances of you repaying the money that you owe.

Now speaking of your credit score, let’s learn how to access your credit score. You can access your free copy of credit reports annually from national reporting bureaus like TransUnion, Equifax and Experian.

The credit scores are calculated on the basis of a credit scoring algorithm developed by the Fair Isaac Corp. FICO. The credit scores by FICO range from 300 to 850. The higher the score, the better is the credit.

The FICO scores happen to be implied as follows:

300-629: Bad credit
630-689: Average credit
690-719: Good credit
720 and up: Excellent credit

With this basic frame of credit score calculation, every lender restructures this frame and has own standards for what is a good FICO score.

With this understanding of credit score, now you may have a clear idea of what it takes to have bad credit. Bad credit depicts your failure in the past to complete your credit agreements. It certainly means you either haven’t paid your past credit obligations at all or you haven’t paid them on time. Your credit may be more vulnerable to be bad credit if you repeatedly face hard situations like your accounts being sent to collection agency, you may be charged high balances, have your vehicle repossessed or having filed bankruptcy.

Effects of Bad Credit Score

Credit cards and loan applications not approved

Based on your credit score, the lender will make a decision about your loan application. Having a bad credit will affect the lender’s decision on your loan application. A bad credit score will thereby make it difficult for you to get credit as all your applications for credit card as well as loan will be denied.

Higher Interest rates on credit cards and loans

Creditors and lenders find it more risky to give credit to people with a bad credit score than to people with a better credit score. And so you will end up paying higher interest as a price for the risk that occurs with a bad credit score.

Security deposits on utilities

Your credit score plays a crucial role when you apply for some necessary utilities like electricity, phone, and cable. These utility companies check your credit history before granting the access of the utilities. In cases of bad credit history, you may have to pay a security deposit to install service in your name.

Difficulty in getting a cell phone contract

Cell phone companies also check your credit score during the application process. And people with bad credit usually may have to use a prepaid cell phone with a monthly contract which may turn out to be more expensive.

Higher insurance premiums

Yes, insurance companies do check credit scores. And people with bad credit history always end up paying higher premiums, regardless of the claims they may have filed.

Difficulty in starting your own business

Your bad credit history may get in the way of your brilliant start-up.  A new business may require funding from a bank. But your bad credit history may limit the amount you get for your start-up, irrespective of foolproof idea.

Difficulty in buying a car

Lenders and banks check your credit score before borrowing money. A bad credit score may lead you towards getting no credit or paying higher interest on the amount borrowed.

With these effects of bad credit, you should probably make sure you have a better credit score. No worries, even if you have a bad credit score; you can always improve your credit score. It’s never too late to start.