What is Poor Credit: Everything you Need to Know
When someone has a poor credit score, it usually means that there are certain negative elements appearing in their credit history, which makes them a risky borrower. Numerous factors can result in people having poor credit, which includes recent bankruptcies, high debt balances, former delinquencies.
In most cases, low credit scores indicate that you have unfavorable credit. For those who don’t know, low credit scores are essentially a numeric summary of your credit report’s information. One of the most common credit scores used by many these days are the FICO credit scores. These scores range between three hundred to eight hundred and fifty. The higher the scores, the more desirable they are.
The 5 Ratings of FICO Credit Score
FICO credit scores are divided in 5 different ratings. Here they are:
- Scores of 800 and over are considered exceptional
- Any score between 740 to 799 are considered very good
- Scores around 760 to 769 are good
- FICO credit score between 580 and 669 is fair
- Any score between 580 is poor
Poor Credit – How does it Work
Five critical factors determine whether your credit score will be good or poor. Let us briefly discuss them:
Payment History
There is a high chance that your credit score will be low if you have not paid off your credit cards or there is a history of late payments and delinquent debts.
Credit Mix
Having different credit types like a retail card, credit card, personal loan, mortgage, car loan etc can improve credit score significantly. However, you risk the chance of lowering your score if you only have one of these credit accounts.
Credit History Length
You are more likely to be considered a trustworthy borrower if you have been paying off debts for a long time. Shorter credit history often results in low credit scores. The length of time your separate credit accounts have remained active also influence this.
New Credit
More often than not, people who start multiple credit accounts within a short period are considered risky borrowers statistically and are likely to have poor credit.
Amount Owed
People mostly have poor credit scores because they owe massive sums of money. The higher the debt, the greater the chance that they will not be able to pay the amount owed.
Determining Your Credit Score
A person’s credit score offers them and the lenders an indication about their credit standing. However, you do not necessarily need to look at your credit score for determining if you have poor credit. Some other signs that point towards damaged credit include denied credit card, loan or apartment applications. In some cases, people notice their credit limits cut unexpectedly, which is another sign of poor credit score.
If someone has failed to make their loan or credit card payment for over a month, there is a high likelihood that it negatively influenced their credit scores. Having more than one maxed out credit card is also a surefire way to get unwanted credit scores.
While there are a few other ways to determine your credit score, ordering it from FICO’s website would be ideal. Alternatively, you can also utilize numerous services that can inform you about your credit score without any extra charges. It is worth keeping in mind that most of the free services only provide a limited look at your credit to help you determine if you have poor credit.
It is always ideal to go through your credit report thoroughly for understanding the factors impacting your score. In this document, you will find all the necessary information used for creating your credit score.
Does Poor Credit Result in Penalties
If your credit score is bad, you can face numerous complications when applying for mortgage credit cards etc., as the chances for them getting approval will be quite low. Even if creditors approve your application, they will offer unfavorable terms like high interest rates, which could further affect your score if you are not careful.
Poor credit scores can affect several aspects of your life. For instance, most of the landlords out there will turn you down as a tenant. What’s worse, getting employed can become immensely difficult if your credit history is poor, as most employers go through their candidate’s credit score to check whether they are reliable.
Good credit scores can paint you in a positive light and greatly increase your chances of getting employment. Plus, lenders will look upon your favorably and will offer you the funds without any unfavorable terms. People with excellent credit histories have higher odds of mortgage, rental and loan approvals. What’s more, they have the freedom of choosing from a wide range of loan products and credit cards that offer the best interest rates.
Reasons Why You Must Avoid a Poor Credit Score
You should do everything in your power to steer clear from poor credit scores as they can cause a great deal of financial damage. Here is a list of ways in which a poor credit score can affect you:
Difficulties when Renting an Apartment
People with a substandard credit score may need to deposit a high deposit amount than usual. In some cases, the landlords may even ask you to pay the rents for the first and last month upfront, which can be a massive financial inconvenience.
Failure to Meet Credit Score Requirements
Of course, having a low credit score will mean that you may not be able to meet the minimum score requirements of various lenders. For instance, certain lenders do not accept borrowers with FICO scores lower than 580 without a co-signer. You may also come across certain lenders who only deal with people who have an exceptional credit score history.
High Interest Rates
Traditionally, having poor credit means that most lenders will require you to pay high interest rates. They usually do so to steer clear from massive losses in case the borrower fails to pay. Having high interest rates for your loan will mean that your borrowing costs will increase significantly too.
Difficulties with Mortgage Applications
You may have to pay high down payment fees than usual to qualify for mortgage loans if your credit score is not good. For instance, if your credit score is 580, at the very least, an FHA (federal housing institution) loan enables you to offer a down payment of 3.5%. While you will still qualify, if your credit score is lower than that threshold, your down payment will increase (usually to 10%).
Getting a Utility Account Will be a Hassle
Utility companies check your credit history before approving your request for a utility account. Those with unfavorable credit might have to offer the utility company a refundable deposit to ensure they approve their request.
Auto Insurance Rates will be higher
If your credit history is poor, you may have to pay a high insurance fee to certain automobile insurance companies.
Problems with Car financing
People with poor credit face a fair bit of difficulty when applying for a car long. Like mortgage loans, the car financing company may charge more down payment fee than usual. Whiles some car loan providers advertise no check no credit loans, it would be best to avoid those as their fees is incredibly high.
Limited Choices in Credit Cards
Having a unfavorable credit score limits the amount of credit cards one can choose. Generally, you will only be able to qualify for a secured card. While secured cards are ideal for helping people rebuild their credit, the security deposit for them is around $200, so that applicants can get an equivalent LOC (line of credit).
Remember, you may still not be able to qualify for a secure credit card if your credit score is poor. This is because card providers analyze several other factors besides your credit score, including monthly housing payments and income
Poor Credit Score – How to Improve it
Mentioned below are tried and tested steps that will significantly help you improve your credit score.
Don’t Delay Bill Payment
Payment history plays a massive role for credit scoring models. Paying your debt in a timely manner can improve or build your score. On the other hand, if you develop a habit of paying late, your credit score can take a massive hit. Therefore, it would be best to avoid late payment of bills and an excellent way to do that is to utilize services like autopay.
Go Through Your Report
As mentioned earlier, the information present on the credit report determines your score. Of course, negative information will affect your credit score negatively. Therefore, it would be best to review your report every once in a while to spot any issues or errors and correct them.
Becoming an Authorized Credit Card User
Becoming an authorized user of your friend or family member’s credit card is an excellent way to improve your credit score. If the credit card owner’s payment history is good, your score will improve too.
A Credit Builder Loan Could Help
Credit builder loans are designed specifically for helping people build their credit scores. These are vastly different to traditional loans as the lenders do not offer lump sum money. Instead, applicants have to offer payments in fixed installments. While you still have to pay interest on this loan type, some lenders may return it to you once the loan tenure ends.
Take Help from a Co-signer
If you want a traditional loan, applying for it with a cosigner would be a wise choice. Co signers with sufficient income and good credit can improve the odds of your loan application’s approval. You can greatly improve your credit score if you pay the loan back on time.
Steer Clear from Hard Inquiries
If you are truly intent on improving your credit score, it would be best to postpone applying for credit for a while. Hard inquiries often happen when lenders check credit for evaluating you to see if you qualify for their financial products. They do this because they may consider you a credit risk in case you are trying to get cash from multiple sources. New credit account applications account for ten percent of your FICO score.
Unlike hard inquires, your credit remains unaffected from soft inquiries. The latter often take place when you check you check your score. They can also happen when a credit card issuer/lender goes through someone’s credit for pre-approving them for a financial product. There is also a massive likelihood that you will not see a notable impact on your score if you apply with numerous lenders or shop for a mortgage or auto loan within a brief period.
The Importance of Maintaining a Good Credit Score
Good credit score is vital as it ensures you can borrow money for low or even zero percent interest rates. For instance, if your credit score is excellent, you could qualify for a Zero Interest APR credit card. This credit card provides no interest finance options for an extensive period. You can save a great deal of money by using this type of card. It can also help you steer clear from debt quickly, if you transfer balance from a card with high interest.
It is also worth keeping in mind that having good credit score can help you avoid certain security deposits while lowering down payment rates for some loans. Things like these can free up cash, which you can utilize for other expenses and financial goals. Once you start adding up these savings, maintaining good credit will help you save thousands of Dollars.
Final Thoughts
Poor credit scores can result in a range of financial complications in the short and long term, which is why you must steer clear from them. If you want to learn more about how to avoid poor credit, get in touch with Credit Follows. Our experienced team can help you maintain your credit history through tried and tested techniques. All you need to do is contact us and we will assist you to help you achieve your financial goals.
