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What Happens If You Have A Bad Credit Score

What Happens If You Have A Bad Credit Score

Creditworthiness is one of the most important aspects of your financial being to take good care of. It is a number that you should know by heart all the time. This is the number used by businesses and financial institutions to decide whether to provide you with their services and products, or not. Even landlords and insurance companies look into this before deciding to extend their facilities or services to you. I am talking about your credit score.

What is a credit score?

A credit score is an evaluation of your credit-worthiness. Banks and other lending institutions look at your rating before they decide to extend you credit. The scores are between 300 to 900. If your score is too low, this means that the potential risks of loans to be in default and the bank’s possible loss due to bad debts are high resulting in the disapproval of credit and loan application. This includes credit cards, lines of credit, mortgage and other unsecured loan products. Even landlords look at credit score being an important deciding factor in making a leasing decision.

Here is the breakdown of the credit scores and what it means:

As you can see, the higher the score, the better is your rating. Anything below 620 is considered a low or bad credit score. Your credit score is a measure of trust. The higher your score, the more likely financial institutions will trust you to be able to repay any credit being extended. Having an excellent credit score can also empower you to shop around and negotiate the interest rates.

What happens if you have a bad credit score?

You will have difficulty in availing of credit when you have a bad or poor credit score. There are institutions that will still cater to you and provide you with credit but with a higher interest rate. If your score is affected by bankruptcy or consumer proposal, the difficulty level is twice as much. Not a lot of financial institutions are keen on extending credit to people falling under this category.


Factors negatively impacting your credit score

There are different factors affecting your credit score. Each one contributes to how your score is calculated. Here is the breakdown of what negatively impacts your credit score:

Not paying your bills on time – this is the number 1 factor that lowers your credit score. This covers all your monthly bills including your credit card and utility bills, student loans, lines of credit, car loans, etc

Credit History – shorter credit history means there is a shorter record of your borrowing habits. Since one of the indications of having good credit is having a good payment history, if you have only had credit for a shorter amount of time, your credit score will not be as good as those having perfect payment history for a longer period.

Not paying your credit card in full – paying only the minimum required payment tells the financial institutions that you cannot afford to pay back what you owed on a monthly basis. This will also impact your bottom line since you will now be charged with interest on your next credit card bill. Credit card interest rates ranged from 14.99% to 29.99%, depending on your creditworthiness.

High ratio of the amount owed against total credit available – if you use up over 50% of your total credit available, financial institutions would deem you as credit hungry and this will lower your score. Try to use just about 30% of your total credit available. For example, if you have a $5,000 available on your credit card and another $5,000 on your line of credit, try to have a balance of less than $3,000. If you can not pay off your credit card, at least pay it off using your line of credit. This way you will be paying a lesser interest rate. But always aim to pay off your credit card balance and have less than $3,000 in outstanding credit on a monthly basis.

Declaring bankruptcy or under a loan repayment program – this hits your credit score big time. The only way for your credit score to improve is when you have paid off your loan under the repayment program, pay your other bills on time and maintaining a low ratio of the amount owing against total available credit.

Not reviewing your credit score – a lot of us do not know that we need to review our credit score. We need to make sure that we are in good credit, especially when we need to apply for loans/mortgage. We can also verify the transactions affecting our score, to review for incorrect reporting or irreconcilable transactions due to identity fraud.

Services Available When You Have Bad Credit

There are services out there that can help you monitor and improve your credit score. Borrowell has been very good at keeping you up-to-date with your credit score for free and they also provide recommendations on how to improve them. They can offer you information on which credit card companies can give guaranteed approval based on your credit score. They also show offers from other companies to provide you with unsecured loans – but just be aware of the very high-interest rates.

How to Improve Credit Score

Improving your credit score is basically doing the opposite of what damaged your credit score in the first place. It is easy to improve your credit scoredamage your credit score, but it takes time to rebuild it. Here’s what you need to do to improve your score:

  • Make sure you pay your bills on time
  • Pay your credit card balance in full
  • Do not use more than 30% of your available credit
  • Do not close old credit cards – this helps in building a credit history
  • finish paying off your balance for loans under the repayment program
  • always review your credit score

Having a good credit score is very important. This impacts how you are being perceived by financial institutions. Our life revolves around credit: credit cards, loans, mortgages, etc., and we need to take good care of our creditworthiness.

13 Comments

Sergio Posted on7:29 pm - December 30, 2019

Great article. FL is definitely a right that we all should be made aware of early on. This article is great for those who dont understand the breakdown of what makes up your credit score! I highly recommend this to anyone looking to improve their score!

    Leslie Posted on8:05 pm - December 30, 2019

    Thank you for your comment and recommendation, Sergio. I really hope that financial awareness will become the norm.

Jeff Posted on7:34 pm - December 30, 2019

I did learn a lot about bad credit over the years after my divorce, but one good thing you can rebuild your credit using the tips you shared in your article.

I only have one question, I was curious if you could recommend the best way for a person to check their credit score

Jeff

    Leslie Posted on8:03 pm - December 30, 2019

    Hi Jeff,
    Some banks offer to provide you with your credit score for free. My credit card company does that for me. I am with Capital One. Also. Borrowell is another company that offers your credit report for free. One good thing in Canada is we can ask for a copy of our credit report as often as we need to.

Cynthia Posted on7:46 pm - December 30, 2019

Leslie, thank you for all this fabulous information! There is so much here that I didn’t know! I’m lazy about paying off my credit cards (always something better to do with that money!) so please tell me this.: When you speak about only using 30% of your available credit, does that mean that you should only have 30% at the end of this billing cycle? Or at any point uring the month? When do these things get reported?

    Leslie Posted on8:02 pm - December 30, 2019

    Thanks for your question, Cynthia. As much as possible, pay off your loan balance, especially your credit card balance as this carries a very high-interest rate. There are other credit cards that offer an installment plan (6 months or 18 months to pay) so you can leave some balance there as long as you are paying the required monthly payment. The balance in these cards will be part of the 30% credit utilized. Some loan accounts like a line of credit can also have a balance that you can try paying off each month.

Tracy Posted on8:42 pm - December 30, 2019

Hi Leslie,
Thank you for the very informative post. It sure does give a great deal of information for anyone having questions pertaining to their credit rating. It is so important to take care of our credit rating and not find ourselves in a position there we have to declare bankruptcy and start all over again, which can be very difficult.

All the best

Tracy

Kathy Posted on10:22 pm - January 4, 2020

Thank you for this useful information on credit score. Everyone should check their score occasionally, especially if they’re considering a mortgage.

    Leslie Posted on11:03 pm - January 4, 2020

    Yes definitely. The last time we renewed our mortgage, I found out that you can only get the best rate if your credit score is really good.

CT Posted on3:43 am - January 5, 2020

Hello, thank you for this informative post. The timing is amazing. My son is just starting in his business and I remind him it needs to take care of your credit score because it will affect your business career so much. I’m just looking for some information online but most of them look confusing and difficult to understand.

Luckily I landed on your site. You explain it in a simple way that impresses me a lot. I can read it easier one by one. I think I don’t need to take more time to research it any more. I will share it with my son and ask him to study further about that.

    Leslie Posted on5:29 pm - January 5, 2020

    I am glad you found my post easy to understand. That is what I am striving to do. Financial information can sometimes be too daunting. I hope your son will be able to manage his credit score properly.

Michelle Posted on4:43 am - January 6, 2020

Leslie, Thank you for giving an insight to good credit, from what I have discovered, in order to have a good score, you need to make sure you are paying on time, however it’s also ideal to have a strong record of payment. If an individual say just starts working and they decide to get a credit card, do the financial institutions then look at the length of time they are employed as they don’t have a track record?

    Leslie Posted on2:36 pm - January 6, 2020

    Hi Michelle,
    For newly employed, banks look at the employment record by requesting copies of payslips and probably a letter of employment. They are offered a lower credit than those who have had a long and good credit history. Banks also have credit cards for student which, if properly guided, can help them learn financial management.
    Thank you for your comment. Appreciate it.

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