What Are The Effects Of Bad Credit?
When you make a purchase on your gleaming credit card, you might not stop to consider that you are being tested. You may only be thinking about those shiny new shoes, or that top speed new computer. As you miss the odd payment on bills on loans you might not even stop to consider what effect this could be having on your credit rating. What’s the big deal, right?
A credit rating is a record of all of your transactions that involve borrowing and repaying money. If you have borrowed money and made the agreed repayments, then your credit rating will be positive, and lenders will look favourably upon it. If you have failed to meet your obligations, then your credit rating declines, and lenders will view you as high risk.
A bad credit rating actually has more impact than you think. Missing one or two repayments is not going to do you much harm in the long term, but if you consistently show an irresponsible approach to lending and paying back your loans, then your credit rating will start to reflect this, and until you start to prove otherwise, the assumption will be that you are not the safest person to lend to.
Main Effects Of Bad Credit Rating
The main effects of a bad credit rating are usually revealed when you try to lend money again. Lender have access to your credit rating, which is one of the primary factors that effects how likely they are to grant you loan, and the conditions that will apply to you.
Lender Reluctantly: Your bad credit rating is going to set off alarm bells when it comes to borrowing more money. You may even, in cases of very bad credit, struggle to obtain a mortgage, finance on a car, or a loan for a new business. This can be very restrictive.
Higher Interest Rates: In a lot of cases, you may still be able to get a loan with bad credit, if for example you can prove that your current financial situation is stable. However, as a result of your proven track record lenders may decide to balance the extra risk by offering you a loan with higher interest rates. You effectively end up paying more on your loans.
Loan Terms: It is not only the interest rate of future loans that can be affected by a bad credit history, but other loan terms too. Lenders may, for example, offer to lend you less money than usual, demand that loans be secured against your assets, or you may be required to make larger down-payments on your mortgage, of up to 15-20%.
Lesser Known Effects Of Bad Credit
As well as the main effects of bad credit, which have to do with your ability to apply for credit in the future, there are also some lesser known effects, and some of them can have quite an impact:
- Insurance Premiums: Insurance companies say that there is a link between bad credit and the number of claims. For this reason they tend to charge higher premiums if you have a bad credit score.
- Lease On An Apartment: Some landlords will check your credit card rating before you lease an apartment, as an indicator of how responsibly you can pay rent. This can cause issues renting a home.
- Mobile Phone Contract: A cell phone contract is a kind of credit, as the company extends you a month of service to you. They too look at your credit, and may even demand that you get a pay-as-you-go phone, or a month by month contract. Both of these options work out more expensive.
- Employment: A bad credit rating doesn’t effect employment too badly, but can do at the upper levels of management, or jobs in the finance industry, especially if you have large amounts of debt, or bankruptcy on your record.
- Utility Bills: Utility companies check your credit rating, and can ask you to pay an upfront security deposit before they provide your service.
What To Do When You Have A Bad Credit Rating?
The best idea is to always keep on top of your repayments, and to borrow money responsibly. However, if you already have a bad credit rating then you can recover it by showing your ability to keep to your obligations in the future. Take a gradual approach to credit recovery with financial management and proper budgeting. If you are struggling to meet minimum repayments there are many debt solutions that can help. Contact Free From Debt today if you need help with your credit rating or debt.