Understand the effects of a bad credit rating
As you make another big purchase on credit, you might be wondering what will happen if you miss a payment or two. Will your creditors start calling you? What will happen to your interest rates? How bad could this get? All of these questions are valid to ask, especially if you’ve never been through the process of having bad credit. To better understand the effects of a bad credit score, it is essential to first understand what a credit score is and how it is determined.
Credit score overview
Your credit score is a number assigned based on your credit history. Lenders use this number to determine your level of risk when borrowing money or taking out lines of credit. There is a great challenge to get a loan with bad credit, because most lenders consider you a high-risk borrower. The higher the risk, the more likely you are not to repay the loan, which is why most lenders will refuse your loan application or charge you much higher interest rates.
How your credit score is calculated may vary by country, but generally it’s based on information from your credit report. This report includes information such as how often you make payments on time, the amount of your current debt, and any derogatory marks such as bankruptcies or foreclosures. Based on this information, a mathematical formula is used to generate your credit score.
Generally speaking, a good credit rating is above 700 points. A bad credit score is less than 600 points. And anything in between is considered fair credit. Of course, the higher your score, the better, as this will show lenders that you are a low-risk borrower.
Effects of a bad credit score
If you have a bad credit score, several things can happen.
Increase in interest rates
A bad credit score can have a ripple effect on many aspects of your life, including your interest rates. When you borrow or take out a line of credit, the lender will look at your credit score to determine how risky it is to lend you money. A high credit score means you are considered a low risk borrower, while a low credit score means you are considered a high risk borrower. Therefore, lenders often have apply higher interest rates borrowers with poor credit ratings. This is because they take on more risk by lending to someone who may default on their payment obligations.
Reduced credit limits
Another consequence of bad credit ratings is that creditors can reduce your available credit limit. This happens because the creditor doesn’t want to lend you more money than you can afford to repay. If you have a history of late or missing payments, your creditors may consider you a high risk borrower and choose to reduce your credit limit. This can make it difficult to make large purchases on credit, such as a car or a house.
Difficulty getting approval for new lines of credit
In addition to reducing your existing lines of credit, you may also have difficulty getting new lines of credit approved. This is because lenders want to lend money to borrowers who they believe will be able to repay their loans. If you have a bad credit score, it can be difficult to convince a lender that you will be able to repay a loan. As a result, you may be denied new lines of credit or only approved for lines of credit with high interest rates and unfavorable terms.
Consequences in other areas of your life
A bad credit score can also affect other areas of your life. For example, if you are looking to rent an apartment, the the landlord can check your credit score to determine if you are a responsible tenant. If you have a bad credit rating, the landlord may be less likely to approve your application. Also, some employers may check your credit score as part of the hiring process. This is more common in positions that involve handling money or working with sensitive information. If you have a bad credit score, it could affect your ability to be hired for certain positions.
As you can see, a bad credit score can affect your life in many ways. It’s essential to keep this in mind if you ever fall behind on a payment or are considering opening new lines of credit. A bad credit score can have a real, negative impact on your life, so it’s important to do everything you can to avoid it.