What a Low Credit Score Can Lead To

FT Contributor  | 

According to the FICO credit score scale, a very poor credit score is below 580, while fair credit is in the 580 to 669 range.

There are many reasons you could have a bad credit score. For instance, you may have missed multiple payments on a loan. You may have had bills sent to collections. You may have even simply let your debt build until it got out of hand. Regardless of the specific reasons, if you have a bad credit score, chances are it’s going to hamstring your ability to financially function sooner or later.

Below are five of the most poignant ways that a bad credit score can hamper your ability to function — as well as a few suggestions to help get your score back into the good, very good, or even exceptional range.

1. Credit and Loan Approval

One of the most obvious ways that a bad credit score will hurt you is through an inability to borrow money.

When you have a bad credit score, it indicates to a lender that you have struggled with both borrowing and managing money in the past. Factors such as unsavory payment history, over-utilization of credit, and an excess of new lines of credit — all of which affect your credit score — can cause potential lenders to deny approval of a loan application.

This isn’t done out of spite, but simply from a rational concern that past struggles will dictate future behavior. In other words, if you haven’t made payments in the past, they’re worried that you won’t be able to make payments in the future.

2. Unagreeable Credit Card and Loan Rates

Even if you get approved for a personal loan, credit card, mortgage, or any other kind of loan, your bad credit may come back to haunt you. This can happen in multiple ways, such as the lender creating terms that protect and favor them.

If you have bad credit, you may also find that you can only get approved for a loan at an exorbitant interest rate. For example, the interest rate for a car loan for someone with a credit score over 700 is typically around 5%. In comparison, the interest rate for someone with a credit score under 700 can jump to nearly 12%, and if the score drops to under 650, the interest rate can rise to over 18%.

3. Getting Approved for Housing

Those with bad credit can often find it difficult to be approved for housing as well.

On the one hand, if you pursue buying a house with a mortgage, you may find that the terms of the loan are, once again, stacked in favor of the lender. If you’re getting approved for a mortgage with bad credit, you may be surprised to find that you must provide a larger down payment or pursue a government-backed FHA loan — which, it should be noted, comes with extra hoops to jump through and additional strings attached.

Even if you’re renting an apartment, bad credit can make it difficult and, at times, even impossible to get approved. Many landlords use credit checks to inquire into a potential tenant’s past financial history.

As with a lender, this provides them with a snapshot of your past ability to make payments on time and generally manage your money wisely. If they aren’t impressed with what they see, they may deny your application.

4. Additional Security Deposits

Larger down payments on a house aren’t the only additional fees that come with bad credit. A fair or very poor score can also lead to higher increases in security deposits.

If, for instance, a utility company sees you as a liability, they may require you to put hundreds of dollars down before they’ll turn on electricity or gas to your home. Even when it comes to the home itself, if a landlord does decide to let you rent, they may require a month or two of rent as a security deposit.

While security deposits are used often, even for those with good credit, they are typically larger and more common when you’re functioning with bad credit.

5. Difficulty Saving

Finally, you may find that your own financial condition can atrophy when you’re saddled with bad credit. To improve your credit, you’ll likely need to continue spending. For instance, you shouldn’t stop using your credit cards or borrowing money. You must continue doing so in a healthy manner in order to reverse the damage that has already been done.

This need to continue spending to improve your credit can make it exceedingly difficult to put any money towards retirement, an emergency fund, or any other common forms of savings.

How to Improve Your Credit

If you can resonate with the effects of bad credit, and you’re not sure how to improve your situation, here are a few suggestions for ways to increase your credit score and start building towards good credit.

  • Create reminders and notifications to make your payments on time.
  • Set up autopay when you can.
  • Create a budget that helps you avoid accumulating extra debt.
  • Review your credit report and dispute any errors that you may find there.
  • Reduce your credit utilization ratio to 30% or less by either paying down existing debt or increasing your available credit by opening up a new credit line.
  • Keep old credit cards open and unused to maintain a lower credit utilization ratio.
  • Avoid hard credit checks unless absolutely necessary.
  • Practice good credit-related financial habits, such as paying off credit cards every month, only taking out loans when you need them, and creating short- and long-term financial plans.

If you can follow these tips, you can slow the financial damage wrought by a low credit score. Over time, as you continue to adhere to healthy credit principles, you’ll see your credit score rise and, before long, you’ll begin to feel the benefits that come from operating with good credit on a daily basis.


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