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How Does Bad Credit Affect You?

Jun 29, 2020 |

Bad credit is a result of a cyclical habit of paying late or borrowing more than you can pay off. However, there are also instances when you are placed in a tight financial position because of unexpected expenses that derail your budget allocation.

Mike Abelson

Bad credit is a result of a cyclical habit of paying late or borrowing more than you can pay off. However, there are also instances when you are placed in a tight financial position because of unexpected expenses that derail your budget allocation.

There are many negative effects of bad credit, and it may not be your aim to be financially irresponsible, but paying off your credit takes discipline and tests your integrity. Creditors do not go after you spite you; they want you to pay back the money you loaned.

Lenders assess your credit risk, which is a person’s tendency not to pay off his or her loans. The higher the credit risk of the borrower, the less chance you have to find a lender who will loan you money. In evaluating a person’s credit risk, lenders will look at your credit score. Sometimes, people interchange credit scores with credit ratings. However, these two terms, although similar, are two different assessments.

A personal credit score is based on the information contained in your recent financial history or your credit report. A credit report is a comprehensive overview of your previous loan payments, credit applications and account, loan balances, delinquent or past-due payments,business bankruptcy or foreclosures, and so on. On the other hand, a credit rating is for a business rather than an individual. This rating system is utilized to evaluate how likely a business is to pay their debts.

1. Job Application Problems

Many companies ask to run credit background checks on their applicants, especially in positions that require financial management. Some even consider the credit scores or performance of applicants in the evaluation process. Your chances of landing a job may also be endangered by your bad credit, especially if you are applying in a government agency, financial institution, or a company that requires a security clearance.

2. Steeper Rates and Stricter Terms

If you have a history of bad credit or a poor credit score, securing a loan is complicated. However, for online payday loans or lenders that may be more accommodating, getting an approved loan may mean higher rates and more restrictive terms and conditions. Lower credit scores usually translate to higher interest rates.

Higher credit scores may help you qualify for more significant credit limits, better interest rates on your mortgage and some lenders who require down payments may even do as much as lower the fee for you. Your credit standing has a direct effect on how much you can borrow, how much down payment you have to secure, or how high your interest rates might be.

A high-risk borrower is most likely required to give an enormous down payment or pay insane rates while a low-risk borrower can acquire the same loans but with cheaper fees. If you have poor credit history and score, this significantly increases your monthly dues.

3․ Difficulty in Securing a Loan

Your lender would want to assess how likely you are going to pay them back. Your credit score or credit rating is a tool to determine whether or not you are creditworthy. A standard credit rating system used by lenders is from FICO or the Fair Isaac Corporation. Currently, another credit score provider called VantageScore is gaining popularity among credit raters and bureaus. It is similar to FICO, but it explains why your credit score is the way it is.
Some major credit raters for enterprises are Fitch, Moody’s, and Standard & Poor’s. On the other hand, major credit bureaus that assess personal credit scores are Experian, Equifax, and TransUnion.

So if you have a poor credit score based on assessment, you will most likely experience difficulty applying and securing a loan.Online payday loans may help you bridge a gap or unexpected expense, and some companies may lend you without checking your credit score. However, they still assess your credibility, and you still have to prove your capacity to make loan repayments on time.

4. Home and Rental Troubles

Having bad credit may also put your home purchase or rental plans into jeopardy. If you are considering an apartment lease or buying a new home, your credit score can make or break your plans. FICO scoreshave to be as high of at least 620 if you are planning to purchase a house through a loan. Also, it is logical that a landlord runs a credit check also to protect his interests. Landlords are wary of applicants with a bad credit report, delinquencies, business bankruptcy, and late payment history because these are most likely to fail to make on-time payments.

Rental trouble or failure to buy a house is a classic illustration of the negative impact of having bad credit since, in this case, your place of living is affected. People with low credit scores may still be able to secure a home loan but with higher interest rates or mortgage insurance. Also, some modern properties in good neighborhoods are usually only rented to people with good credit standing. On the other hand, landlords of apartments and other rental spaces in quite undesirable areas with substandard properties tend to be more lenient in terms of credit scores.

5. Higher Insurance Rates

Similar to interest rates, insurers in some states usually require clients with bad credit to pay higher premiums or rates compared to people with good credit standing despite having identical insurance policies. There is a seen correlation between poor credit scores and filing for insurance claims. A 2019 report by an insurance comparison site, Zebra, has shown that drivers with poor credit standing paid more than double auto insurance premiums than drivers with good credit standing.

The Takeaway

Bad credit is not permanent, and it should not prevent you from bouncing back. You can explore ways to improve your credit standing to avoid all the negative impacts that a poor credit score brings, find strategies to save more, increase the number of your income streams, and cost-cut. Remember that turning your life around and improving your credit standing and behavior is not impossible; it just takes focus and discipline.

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