Credit scores were created to be used as an index for how reliable someone is to pay back money that they've borrowed. Unfortunately, having poor credit can also make other areas of your life difficult since you may be viewed as being untrustworthy or irresponsible in general.
The issue here is that many don't prioritize having a solid credit score until it's too late. In fact, most people aren't aware of how a low credit score can negatively affect them.
Not sure where to start? Don't worry, we’ve got you covered.
Let's take a look at everything you need to know about common low credit problems you may encounter.
1. Harsher Loan Terms
When a lender provides money to a borrower, they do so under a set of terms to help mitigate the inherent risk that comes with letting someone else handle funds you give them. If your credit score proves that you're responsible and likely to make payments on time, the lender will be looser with their conditions.
If your score is low, however, the lender may impose harsher terms to further protect themselves in the event you don't pay all (or any) of the borrowed amount back. These could include:
Higher interest rates
Shorter repayment terms
The requirement of collateral (car, jewelry, etc.) to secure the loan
While none of these are inherently negative, they can serve to complicate a process that may not have room for complication. Securing a reasonable loan for a new car after your breaks down, for example, could place you in financial strain for years to come.
Or, you may encounter lenders who drastically shorten their normally-reasonable loan terms due to your credit score. Regardless of how a bad credit score affects you, it's more than likely going to be in a negative way.
2. Difficulty in Obtaining Approval
In some cases (such as if your credit is particularly low), you may have trouble getting approved at all. This goes for more than just conventional loans, too— cell phone contracts, mortgages, etc.
In many scenarios, failing to get approved can be a significant setback. This is especially true if you face multiple rejections in separate areas (unable to secure a loan to pay off debt while also being unable to activate a new phone line).
So, it's imperative that you keep your score as high as possible so you don't end up in a situation that causes your score to drop even lower.
You can check out https://moneytrumpet.co.uk/bad-credit-loans/ for more info on how to secure loans with a low credit score.
3. Difficulty Securing Employment
There are plenty of occupations that don't place too much emphasis on an applicant's credit. Those in the finance industry, though (as well as those for government agencies), will likely run a credit check and use it as core criteria in determining an applicant's fit for the position.
In certain instances, having a poor credit score may cause your prospective firm to consider other candidates instead, and it may be the deciding factor between two applicants who are otherwise evenly matched. Unfortunately, it's also legal for companies in many jurisdictions to use this information as long as they inform the applicant why they didn't get the job.
Jobs that require security clearance will be equally difficult to obtain, and those with poor credit may find themselves being unable to obtain their security clearance at all.
4. Less Likely to Be Approved For Renting
Similar to how a lender would be skeptical of loaning money to a borrower with a low credit score, a landlord may not want to rent their property to someone who appears to be fiscally irresponsible. Landlords often don't take into account what caused the drop in credit score or how long ago it occurred, meaning that a single instance where debt was sent to collections could be the cause of you being unable to rent an apartment or home.
If you have the opportunity, contact your potential landlord and explain that your credit report is going to display a low score and offer other ways that you can prove your reliability. Having a solid consistency on past payments, for example, can show them that you'll be able to pay your rent in full each month.
While this isn't guaranteed to get you in the door, you'll likely get passed over as an applicant if you don't go out of your way to acknowledge the situation.
5. Higher Premiums For Insurance Coverage
Insurance companies aren't exempt when it comes to businesses that will take a close look at your credit score. In fact, insurance providers may be the ones that examine yours the closest.
Low credit tells them (at least on paper) that you're at-risk for missing payments or having other financial obligations get in the way of you paying your premiums. For coverage like car insurance and homeowners' insurance, you could find that you're paying a significant amount each month just for basic coverage.
In some cases, you may even find that your financial hardship prevents you from being able to afford even the lowest tier of coverage, which can impede your ability to move forward with certain transactions.
Dealing With Credit Problems Can Seem Difficult
But it doesn't have to be.
With the above information about these credit problems in mind, you'll be well on your way toward avoiding these situations at all costs.
Want to learn more financial tips that can help you out in the future? Be sure to check out the rest of our blog.