A credit score is always a priority that a lender looks at to loan you. A poor credit score means you will get a loan at unattractive interest rates. A lot of reasons are out there to have a poor credit file, but thankfully you can improve your score to be eligible for attractive interest rates.
As soon as you put in the application, a lender will turn to credit reference agencies to access your credit report. They can either refer to the score given by credit reference agencies or use their own formula to calculate your credit score. This three-digit number will determine how loyal you have been to your previous payments.
A bad credit score ranges between 561 and 720, according to Experian. It is in the “very poor” category when it is 560 and below.
“Whether you apply for a short-term or a long-term loan, no lender can loan you money without running a credit check, but payday loans make an exception.”
What are the factors that result in a poor credit score?
There could be multiple reasons for having a poor credit score. Some of them are as follows:
1. Late payments or missed payments
Late or missed payments remain mentioned on your credit report for up to two years. Setting up auto-debit is a good way to avoid falling behind on payments. “If you think that you will not be able to pay down the instalment on time, talk to your lender.” Lenders usually wait 30 days to report to credit reference agencies so that you can clear your dues within this time. However, late payment fees will be added to your account.
A default on your credit
A default on a loan is considered when you absolutely fail to pay it off. This leads to the issuance of a CCJ. “Even if it is satisfied, it will continue to show up on your credit file for up to six years.” When you miss payments frequently, your lender will start sending emails and messages to be ready to bear the consequences if you still do not make the payments.
Frequent missed payments result in your account being sent to collection agencies. They may drag you to the court if you do not turn to their letters. If you declare yourself bankrupt, this will equally harm your credit score.
2. Using too much of the available credit
Be careful about the credit utilization ratio. It should not be more than 30%; better if it is low. Try not to transfer the credit card balance to the next month.
Otherwise, a lender may assume you are already in the red and charge hefty interest rates. Clear all the balance prior to the ending of the interest-free period. However, try to clear the balance more frequently, as the date when your credit card provider informs credit reference agencies of the balance may be before your payment date.
3. Little or no credit history at all
Having no credit history at all or a little credit history also accounts for a poor credit score. A lender cannot determine whether you will be able to adhere to a repayment plan. You will be considered a borrower with higher default.
Use a credit builder loan to assemble your credit score from scratch. These loans last for at least six months. If you pay down the debt on time, you will be able to build some credit history. However, there is still no guarantee that you will get a good credit score as other factors like a credit mix, the length of the loan, and recent or old credits also count in calculating a credit score.
4. Identity theft and errors
Identity theft is a case when someone takes out a loan using your identity and makes a default. Sometimes errors could also show up on your credit report. Check your credit file periodically and dispute errors if you find any. Credit bureaus may take a month to investigate the case and fix errors.
How does a bad credit score become problematic for you?
A poor credit score does not just affect your borrowing capacity. It can hurt you in many ways.
1. High-interest rates
You will get attractive interest rates when you have a good credit score. Unfortunately, interest rates will be higher when your credit score is not stellar at all. Chances are you get approval for small emergency loans, but when it comes to a mortgage or a car loan, you might face some difficulties in getting signed off on.
2. Have difficulty renting a flat
A landlord will be reluctant to rent you a flat if your credit score is too bad. They will likely seek a higher deposit. In fact, rent can also be slightly higher when your credit score is unsatisfactory.
3. Auto insurance premium will be higher
A few insurance companies will likely charge higher insurance premiums if your credit score is not decent.
4. Utility accounts
Utility service providers will peruse your credit report, and if they find your score lower than fair, they will ask you for a refundable deposit.
How can you improve your credit score?
Now you know what a bad credit score is and how it can affect your finances. The next step is to know the ways to do up your credit score:
1. Review your credit report
“You should review your credit report at least once a year to spot errors or identity theft that can take a toll on your credit score.” You can review your report free of cost. Ensure you do it before applying for a loan so you know your report does not consist of any errors resulting in negative consequences.
2. Pay your bills on time
Regardless of the credit score model, payment history accounts for a larger proportion of your credit rating. Apart from your debts, pay off all your bills like energy, rent, and mobile and broadband plans on time. The payment must not be overdue for more than 30 days. Otherwise, they will be reported to credit bureaus.
3. Apply with a co-signer
If it is urgent to take out a loan and you cannot wait to have your credit score improved, you should apply for a loan with a co-signer. Make sure that they have a good credit score and strong income. Against all odds, you will get a loan at a lower interest rate if you apply with a co-signer.
4. Consider taking out instalment loans
Small loans must be repaid in full and will never help improve your credit score. This is because a lender wants to stay your commitment despite the ups and downs in your financial condition. They can get an insight into it when you borrow a larger sum.
Try to take out an instalment loan repaid over a period of months. Pick a reliable lender so you can get better interest rates. Make sure the lender reports timely payments to credit reference agencies. LoansForever provides instalment loans at the most competitive interest rates to help bad credit borrowers improve their credit scores.
The bottom line
In case of a bad credit score, you will have a difficult time seeking approval for a loan as lenders will consider you risky.
If somehow you manage to get the nod, you will have to pay higher interest and down payment. This will affect your ability to meet your other expenses as well. A good thing is you can do up your credit rating.
Roscoe Tanner
Roscoe Tanner is the Editor-in-Chief, leading a large team of writers at LoansForever. He has expertise in writing for various borrowing options like personal loans, long-term and short-term loans, unemployed loans and many more. Roscoe joined LoansForever in 2015 but previously worked with many reputed loan companies. He performs the major role as the editor, covering key aspects of loans and finance. Roscoe Tanner wants to serve at large in the progress of the company and to present a modern alternative to the traditional financial industry in the UK. He is a Certified Financial Planner and has a god-gift of connecting with people through his valuable suggestions and writings. His expertise as a writer and editor in the finance industry is based on his education qualification. Roscoe has done a Master of Business Administration (MBA) in Finance.
