A credit score is defined within a numerical range between 300 and 900, and determines the creditworthiness of a consumer. When a borrower’s credit score is high, they will look better in front of potential lenders. A person’s credit score depends mainly on their credit history, which mainly consists of their total levels of debt, number of active accounts and repayment history.
A credit score of 574 or less is considered bad. A bad credit score ultimately means that lenders, banks, landlords and certain employers will view you as financially irresponsible.
Credit scores are calculated through two reporting agencies: Equifax and TransUnion. Different algorithms and scales are used in order to identify a borrower’s score. A lower score will mean the same thing everywhere; hence, making you a risky borrower.
How does a bad credit score impact your finances? Is there a way to fix your bad credit score? Continue reading to find out more.
How Does A Poor Credit Score Impact One’s Finances?
A bad credit score can close the door to several financial options and products. Reporting agencies use different proprietary algorithms in order to figure out how likely a borrower will honour their payments on a credit card or a loan. In other words, both the credit report and the credit score will show future lenders your reliability when it comes to paying your bills. This will help them in deciding whether that borrower can be trusted to pay for their product or service. A bad credit score makes it very difficult to qualify for low interest rate loans or unsecured credit. Moreover, a bad credit score has a significant impact on a borrower when pursuing any of the following financial goals:
Applying For A Loan
A bad credit score can make it difficult to get a loan approved from a bank. A borrower will likely be offered only a car loan or a personal loan at high interest rates. A borrower needs to apply for credit loans via other lenders in order to qualify for a better rate. Better Than the Bank, for example, is a company that helps several people with bad credit achieve low interest rate loans.
Getting A Job
A bad credit score can keep you from getting a job as a civil servant, or in the financial service industry. In order to get a job in these positions in Canada, an individual would have to pass a credit check.
Applying For A Credit Card
A credit card approval can be tricky if you already have bad credit. This applies particularly for credit companies that come with competitive perks such as cash back, reward points and low interest rates.
Purchasing A House
Individuals with bad credit tend to find it extremely difficult to qualify for low mortgage rates. Moreover, some lenders won’t offer mortgages to those with bad credit even at high interest rates. It’s advised that a borrower work on their credit score before seeking a mortgage. It might also help to find a co-signer or a guarantor.
Renting A House
An individual with a bad credit score will find it hard to get approval on their rental application. This is particularly true when a person is looking to rent a place in a competitive housing market, like the city of Toronto. There is a high chance that landlords might reject the applications of people that have a credit score less than 650.
How Can I Rebuild My Bad Credit?
A bad credit score will highly impact one’s financial goals, and not in a good way. However, this does not mean that it can’t be improved. It is absolutely possible to gradually improve your credit score. As long as you keep your financial habits in mind, your credit score will be back on track before you know it. Listed below are the different things you can do in order to achieve that goal.
Don’t Delay Paying Your Bills
When an individual’s credit score is being evaluated, reporting agencies will look at their history of on-time payments. Paying one’s bills on time is one of the many causes that contribute to a bad credit score. In order to work on your payment habits and make sure that you pay your bills on time, experts suggest signing up for automatic payments. You can also use a calendar or phone as a reminder for when it’s time to pay your bills.
Always Pay In Full
Even though it is important to at least make one’s minimum payment, it is suggested that paying one’s bill in full each month is the right way to go. It will help in reducing the utilization rate, which happens to be the percentage of a person’s total credit limit that they are using.
Make Sure To Use A Guaranteed Or Secured Credit Card
In order to maintain or raise one’s credit score, responsible credit usage plays a crucial role. That is why an individual who is finding it difficult to qualify for a credit card or who doesn’t want more debt, should get a guaranteed or secured credit card. With a guaranteed or secured credit card, your activity is reported to the credit bureaus, which helps build your credit score.
Do Not Cancel Your Credit Cards
A person with bad credit might think that cancelling their credit cards the moment they pay them off is the right move. This is a bad idea. Credit card accounts are connected to credit history and credit utilization ratio. If you cancel your credit card, the ratio will go up since your available credit goes down. Therefore, the credit history of that cancelled card will be removed from the credit report and shorten your credit history, and ultimately decrease your credit score.