What is Bad Credit?
Bad credit does not speak good of anyone. Your credit score determines your credit status. If you have a bad credit report, this will translate into a bad credit score. On the other hand, if your credit report shows that you have a good credit, this will impact positively on your credit score. The question is that, how can use your credit score to determine whether you are having a bad credit or not? This is very simple but let me explain certain things to you here first. Each time you use your credit card, the report is sent to major credit bureaus. They use the information to analyse your credit and then assign you a score ranging from 300 to 850. The higher your credit score, the better. So, how can use interpret your credit score to determine whether you have bad credit or not? The credit scores have been categorised as follows:
Ranges of Credit Scores
- 300 to 629 = Bad Credit
- 630 to 689 = Fair Credit
- 690 to 719 = Good Credit
- 720 and above = Excellent Credit
Notwithstanding the above, the weight given to the credit score as illustrated above still depends on the reason your credit score is being requested. There are certain transaction that will require that you have excellent credit while some may only require that your credit is fair. However, it is better to maintain at least a good credit score. Your credit score affects many things. So, if you have bad credit, it may not do you good. Let me show you some of the effects of bad credit.
Effects of Bad Credit
- Loan rejection: If you want to apply for any loan whether personal loan or business loan, your credit score will play an important role here. It shows whether you are credit worthy or not. So, if you have bad credit, it may be difficult for you to secure a loan. No lenders want to give out loans to somebody that may not pay back their money. Lenders usually regard people with bad credit as high risk customers. If you don’t have access to loans, you can imagine how many things you may not be able to do. For instance, you may need loan to buy a car or it might be that you want to start a new business. We all know that it is not unlikely that you don’t have sufficient capital to start a business. As a new business, your personal credit status is very key. The reason is simple. Your business may not have assets to be placed as collateral for the loan. So, if you don’t have collateral and your credit is also bad, you should not be surprised if your application for loan is declined.
- Disapproval of application for credit card. Credit cards usually provide access to immediate line of credit. Whether you apply for personal credit card or business credit card, the card issuers may not issue you a credit card if you are having bad credit. Notwithstanding there are bad credit credit cards designed for people with bad credit. But the terms of such cards are not friendly at all. Some of these terms may include high APR. This may make you go deeper into debts.
- Low credit limit: If you are lucky to be considered for a credit card even with your bad credit, you may only be granted a very low credit limit. When a credit limit is too low, there is tendency for you to always max out your credit card. If you had a fair credit before, maxing out your card can make you have bad credit score.
- High interest rates: Forget about whatever rates the card issuers advertise on their website. The rates in most cases are for people with excellent credit score and not people with bad credit. Everyone is assessed individually based on their credit status. With bad credit, you should expect to pay high interest rates. The high interest is to compensate the lenders for the additional risks they are taking. The probability that someone with bad credit will default in payments is higher than those people with excellent credit score.
- High Insurance premium: Unfortunately, bad credit does not only affect the interest rates on your credit cards or loans; it affects the premium you will pay on your insurance. Every insurance company will like to be sure that you will be able to pay your insurance premium. The premium will normally be influenced by your ability to pay which is a reflection of your credit score. If two people with the same situations and circumstances but with different credit scores apply for insurance policy, you will discover that the person with bad credit score will pay higher premium than the other person with better credit score.
- Request for security deposit: If you are seeking to rent an apartment or you want to apply for utilities, the landlord or the utility providers may require that you make a security deposit before you can be considered.
- Employment problem: If you are seeking for employment when you have a bad credit, your chance of being granted the employment will reduce. While some companies may not bother themselves about this in as much you can prove you can do the job, some may not offer you the job. People with bad credit, especially when facing with a court judgement may not be able to concentrate on their jobs. Also, each appearance in court is a loss of time to the employers even if they are noy paying you for the lost hours.
Causes of Bad Credit
Now that you have known what bad credit can cost you, I believe that you want to avoid it by any possible means. Also, if your credit is already bad, you can still fix it by avoiding those things that made you have a bad credit in the first instance. So, below are some of the causes of bad credit.
- Missed or delayed payments: Any time you use your credit card, you are simply borrowing money from the card issuer. The reason you were issued the card is that they believed that you will make your payment as at when due. If you miss you payments more than one time or the payments are delayed, the information is being sent to the credit bureaus, this will hurt your credit score. So, if you don’t want bad credit score, it is better not to miss your payments. Also, the payments should be made on time without any delay. If you are having bad credit already, this should not remain permanent. It can be corrected by ensuring that you start paying your balance without delay. With time, you will notice that your credit score will begin to improve. However, you may not be able to achieve this overnight. You need time.
- High utilisation ratio: If you are fond of maxing out your balance, this may lead to bad credit. It does not matter whether you pay in full at the end of every month. Experts suggest that it is healthy to maintain a thirty per cent utilisation ratio. That is, if your credit limit is one thousand dollars, it will be good to maintain a maximum balance of three hundred dollars per time. The reason high utilisation ratio may lead to bad credit is that the credit bureaus will assume that you are having some financial pressure. That is why you are maxing out your card balance. If you have been doing this, it is high time you stopped the practice if you want to improve your credit score.
- Multiple credit requests. While it is not an offence to have multiple cards, it is not good to make multiple card requests the same time or within short space of time. Each time you apply for a credit card, report about your credit history is being requested for. The assumption about this is that, if you are not in dare need of credit, you will not be applying for multiple cards the same time. If you desire to hold multiple cards, give yourself some space of time before you make another application. Also, if your application is turned down, instead of applying for another card immediately, find out why the application is rejected. You can apply for a free credit report so that you can study it yourself. Ensure you correct those things that are wrong before you make a fresh application.
- High credit card balances: Carrying over huge unpaid balances on your card is another reason you might have bad credit. If you don’t want bad credit or you want to correct your existing bad credit score, you should ensure that you pay off your balance every month.
- Unemployment: If you are not employed, it is likely you don’t have regular income coming to you every month. It is assumed that people without source of regular income will not be able to pay their bills or card balances every month. Even you are already holding a credit card, this can make your credit card limit to be lowered.
- Bankruptcy: Filing for bankruptcy is not the best way out of financial challenges. One can actually agree a better repayment terms with his creditor.
- Having only one credit card: If you just have one credit card with a very small credit limit, this may cause you to always max out your card limit. Instead, it may be better to apply for another card. Having a utilisation ratio of twenty five per cent each on two cards is better than having a fifty per cent on a single card.
In conclusion, it is better to avoid anything that can lead to have a bad credit. The costs of bad credit could be very high. Also, if you are already having bad credit, I advise that you start taking steps that can help you correct the situation. It should not be permanent.