Consumers should know how their credit score affects their chances of borrowing money from lenders. If you have a good to excellent credit score, you can expect lenders to offer you competitive loan packages. On the other hand, when you have a bad credit score, applying for that much-needed loan could cost you a lot more money in the long run if you are not disapproved.
What is a Bad Credit Score?
There are several credit scoring models that compute your credit score, but in general 700 or higher is considered a good credit score, and 800 or higher is considered excellent. A bad credit score is any number below 670.
The scoring category of the 2 most popular scoring models shows the following ranges to determine your score.
|FICO Score Ranges||VantageScore 3.0 Ranges|
|300 – 579||Poor||300 – 499||Very Poor|
|580 – 660||Fair||500 – 600||Poor|
|670 – 739||Good||601 – 660||Fair|
|740 – 799||Very Good||771 – 780||Good|
|800 – 850||Exceptional||781 – 850||Excellent|
How Does a Bad Credit Score Affect You?
Your bad credit score not only affects your ability to get a loan; it also affects your ability for other financial transactions or personal dealings that include:
You may have a hard time seeking approval from landlords that include analyzing your credit report in their tenant screening process.
Utility services such as gas, water, and electricity may require you to make security deposits when you apply for them. With good to high credit scores, you could be waived from these deposits, saving you at least $100 to $200.
The best cell phone service packages are those under a contract; but with a bad credit score, your chances of being approved are low.
Some states use information from your credit report, along with your driving history to analyze your risk for submitting a claim. If a risk is present, you can expect to pay a high insurance premium.
More and more employees are now viewing credit reports for employee background checks. This process is especially crucial if you’re applying for work that will involve handling cash or anything financial in nature.
How Do You Get a Bad Credit Score?
Certain bad credit habits that you commit, but may not be aware of, lead to damages to your credit report. Resulting in a downward trend for your credit score. It takes a while before your score can bounce back, so keep these bad credit behaviors and avoid them at all costs.
- Paying late or not making payments
- Defaulting on a loan and having your account sent to collectors
- High credit card balances
- Closing old credit accounts
- Applying for several loans and credits at once or within a short period of time
- Having your home foreclosed
- Filing for bankruptcy
Can I Still Get a Loan With a Bad Credit Score?
You’ll be glad to know that there are a lot of financial agencies willing to extend loans to people with bad credit scores. The downside, however, is that there is a minimum amount for the loan, you’ll be charged a high rate, and there is a low ceiling for the maximum amount you can borrow.
You can also consider the following options with flexible qualifying requirements when you want to apply for a loan with a bad credit score:
Credit Unions – You may be required to put in capital investment toward your member account to back your loan. The maximum allowable interest rate is 18%.
Family or friends – Put your close relationships into good use by seeking loans from family members or friends. Establish your intention to repay the loan with a written contract between parties.
Apply for a loan with a co-signer – Seek the assistance of someone who trusts you and has a high credit score to co-sign a loan application with you.
Tap home equity – In this case, your bad credit score may not matter anymore. If you use your home as equity then you’re likely to get a loan.
Peer to Peer lending – This is a new model of raising funds for personal or business use. You need to create a plan for raising the fund whether for profit or otherwise.
Payday loans – If you’re in need of quick cash, typically $500 or less, then payday loans could be an option for you. Lenders with this type of loan don’t run credit checks but are wary of the high-interest rates that are sometimes up to 400%.
Cash advances – Lenders will require you to show proof of your income. You can also expect interest rates to be higher than your credit card’s standard purchase APR.
Can I Raise My Bad Credit Score in a Month?
There are several proven strategies that can raise your score by several points, but there is no guarantee as to how soon that would be. Your bad credit score is caused by negative reports that stay in your record for months or even years.
However, you can improve your score in a month with the following recommendations:
Improve your Credit Behaviors That Impact Your Credit Score
Keep a disciplined approach in managing your debts by paying on time, keeping a credit utilization ratio of 30%, avoiding hard inquiries and applying for too many loans at the same time, and keeping your old credit accounts active among others.
Learn How to Read Your Credit Report
Doing so will help you analyze the presence of any erroneous information on your report that you can, in turn, dispute for correction.
Raise Your Available Credit
More than paying off your balances to keep a good credit utilization ratio, make the best efforts to control your spending and keep it on bare minimum so you don’t always have to be credit-dependent.
Become an Authorized User of an Established Account
Have a family member with good credit authorize you as a user of the same account. With an additional authorized user to the credit account, the available credit limit may rise, which in turn lower the user’s debt-to-income ratio. This will also boost credit score quickly.
Negotiate on Your Defaulted Credit Card Account
Negotiate with your creditor and ask them to accept partial payments for debt in collections in lieu of reclassifying the debt as “paid”.
Your credit score is one of the most important factors in your credit journey as it not only affects your borrowing but also your business relationships with individuals and institutions. You must always be aware of what patterns of your credit behavior affect your credit score so you can avoid them and help ensure creditworthiness.