As you make another large purchase on credit, you may wonder what will happen if you miss a payment or two. Will your creditors start calling? What will happen to your interest rates? How bad could it get? All of these are valid questions to ask, especially if you have never been through the process of having a poor credit score. To best understand the effects of a bad credit score, it is vital first to understand what a credit score is and how it is determined.
Credit Score Overview
Your credit score is a number assigned based on your credit history. Lenders use this number to determine your risk level when borrowing money or taking out lines of credit. There’s a big challenge to obtaining a loan with bad credit, as most lenders consider you a high-risk borrower. The higher the risk, the more likely you are to default on the loan, which is why most lenders will either deny your loan request or charge you much higher interest rates.
How your credit score is calculated may vary depending on your country, but generally, it is based on information from your credit report. This report includes information such as how often you make payments on time, how much debt you currently have, and any derogatory marks such as bankruptcies or foreclosures. Based on this information, a mathematical formula is used to generate your credit score.
Generally speaking, a good credit score is anything above 700 points. A bad credit score is anything below 600 points. And anything in between is considered to be fair credit. Of course, the higher your score, the better, as this will show lenders that you are a low-risk borrower.
Effects of a Bad Credit Score
If you have a bad credit score, there are a few different things that could happen.
Increase in Interest Rates
A poor credit score can have a ripple effect on many areas of your life, including your interest rates. When you borrow or take out a line of credit, the lender will look at your credit score to determine how risky it is to loan you money. A high credit score means that you are seen as a low-risk borrower, while a low credit score means that you are seen as a high-risk borrower. As a result, lenders often charge higher interest rates to borrowers with poor credit scores. This is because they are taking on more risk by lending to someone likely to default on their payments.
Reduced Credit Limits
Another consequence of poor credit scores is that creditors may reduce your available credit limit. This happens because the creditor does not want to lend you more money than you can afford to repay. If you have a history of making late or missing payments, your creditors may see you as a high-risk borrower and choose to reduce your credit limit. This can make it more challenging to make large purchases on credit, such as a car or a house.
Difficulty Getting Approved for New Lines of Credit
In addition to reducing your existing lines of credit, you may also have difficulty getting approved for new lines of credit. This is because lenders want to lend money to borrowers who they believe will be able to repay their loans. If you have a poor credit score, it may be challenging to convince a lender that you will be able to repay a loan. As a result, you may be denied new lines of credit or only be approved for lines of credit with high-interest rates and unfavorable terms.
Consequences in Other Areas of Your Life
A bad credit score can also affect other areas of your life. For example, if you are looking to rent an apartment, the landlord may check your credit score to determine if you are a responsible tenant. If you have a poor credit score, the landlord may be less likely to approve your application. In addition, some employers may check your credit score as part of the hiring process. This is most common in positions that involve handling money or working with sensitive information. If you have a poor credit score, it could impact your ability to get hired for certain positions.
As you can see, there are several ways a bad credit score can impact your life. It is essential to keep this in mind if you are ever late on a payment or are thinking about opening up new lines of credit. A bad credit score can have a genuine and negative impact on your life, so it is important to do everything you can to avoid it.