Poor Credit Score
Have you ever had an application for a loan or credit card declined and wondered why? Well, the answer could be your credit score. Banks and other financial institutions use this score to assess how likely you are to pay back any loans or credit. If you have a poor credit score a financial institution will take this as a sign that you may have had financial difficulties in the past and could do again in the future. So, taking care of your credit score is important. A low credit score could stop you getting access to affordable credit when you need it most.
What is considered a poor credit score in 2018?
But what exactly is a credit score? A credit score is a number, based on your borrowing history, that is used like the results of a test to understand where on a scale of creditworthiness you are. The highest credit score you can get is 850. Any score between 750 and 850 is considered excellent, between 650 and 699 would be viewed as fair and a score between 550 and 649 would be considered as a poor credit score.
You will fall into the poor credit score category if you have ever missed several repayments on a loan or have missed individual payments on different forms of debt. It can also indicate that you have a lot of existing debt at present and may not be able to comfortably pay back anymore.
|750 – 850||Excellent|
|700 – 749||Good|
|650 – 699||Fair|
|550 – 649||Poor|
|549 and below||Bad|
A poor credit score means that you will probably not have access to the cheapest interest rate on any form of credit you apply for, you will also have a much higher risk of having your application declined from the larger financial institutions.
Negative effects of poor credit
A credit score in the poor range can have several consequences when you apply for certain forms of credit in particular. For example, it is unlikely that you will be granted a mortgage if you have a poor credit score. A mortgage is a long-term commitment paid back over decades.
It requires long-term financial discipline and a steady income. A credit score in this range indicates that you do not have a track record of always meeting your financial obligations on time, a mortgage is a large amount of money for a bank to lend so your credit score is telling them that lending to you is a risk.
Whilst there are some mortgage providers who may still lend to you, these are sometimes referred to as ‘subprime’ lenders. The interest rates can be very high, increase over time and any missed payments would be dealt with harshly.
The same is true of auto loans. With a poor credit rating you are not an attractive customer for the more conservative financial institutions who unfortunately usually also have the lowest interest rates. If you are in this credit score category you will most likely find that the only auto finance available to you is expensive dealer finance. This will often mean that the choice of car you will be able to get will also be limited.
Credit cards are another area where a poor credit score will affect you. A lot of institutions will simply reject your application.Depending on where you are living, the local financial institutions may only offer you a debit card. If you do manage to get a credit card, your credit limit will be low and the interest you will be charged on any outstanding balance will be very high.
You will not have access to low rate introductory offers and will not be able to easily switch your credit card balance between different credit card providers to seek out the best deals. Maintaining an outstanding balance on your card at the end of every month can even push your credit score lower. This would obviously not be a positive.
A poor credit score will also have the same impact on your ability to get other personal loans and home loans for the reasons already discussed.
In terms of personal loans, the options available to you will either be high-interest short-term options or alternative forms of finance like pay day loans. These are obviously very expensive and require ongoing financial discipline to ensure that you clear the outstanding balance every week. With home loans the picture can be even worse.
Even if you own your own home and have equity in it, a poor credit score tells the lender that you may have missed mortgage repayments and have a range of other debts so again, you are not exactly their ideal customer.
Any home improvements you wish to make will have to be saved for. This obviously pushes out when you can do what you need to do to repair or enhance the value of your home.
Where are you, comparing to other people?
Overall it is clear from the above that if you have a poor credit score you are towards the bottom of the range that lenders which to have as a customer. Whilst you could go lower and get a bad credit score, your credit score could obviously be a lot better. With a poor credit score you would be in the bottom xx% of borrowers.
Hot to increase your poor credit score?
However, all is not lost. There are a lot of things you can do to improve your credit score and at least get yourself into the fair credit score range. The first thing you must do is develop a written monthly budget. This will help you to track your spending and make sure that you do not spend too much every month. It also will help to make sure that you do not miss any loan payments because of overspending. This will help to improve your credit score.
A budget also enables you to see where you can save money. The savings you make can then be used to pay down your highest interest debt. This will reduce the overall level of debt that you have which improves your risk profile and drives your credit score even higher again.
When you have done the above, if you do need finance, apply as little as possible with as few credit institutions as you can.
These simple steps will help you drive your credit score up into a higher range and give you access to cheaper long-term credit the more successful you are at implementing them.