Having bad credit could be because of several reasons. They can be due to making late payments on your bills, defaulting on a loan, and many other things. But while knowing the causes of having bad credit is essential so you can avoid it in the future, understanding its effects is more significant.
Most people don’t think about their credit score until they need additional funds to cover some unexpected expenses. Only then do they realize how bad credit could affect their financial endeavor. Though there are ways to fix one’s credit, it may not be quick and easy.
Thus, before you suffer from the same dilemma, we’ve highlighted the possible consequences of borrowing money with bad credit. It might help you to pay more attention to your credit and avoid having a bad one.
Difficulty Securing A Loan Approval
Credit scores are critical to almost every lending decision. It’s one of the essential factors that lenders look into to decide whether they will approve your loan application or not. Your credit score helps them evaluate the risk of loaning their money to you. Thus, having bad credit can significantly affect your chances of getting approved.
Keep in mind that your credit score speaks a lot about you as a borrower. It can give lenders an idea of how likely you will repay the loan and make payments on time. The last thing they would do is lend money to someone who won’t be able to pay it back. Thus, your payment history is the most vital component of your credit score.
If your credit score is low, ranging from 500 to 600, you’re less likely to get approved for a loan or credit card account. But if you do, there are other negative repercussions you would have to deal with.
Restrictive Terms on Approved Loan
It’s not entirely impossible to get approved for a loan even if you have bad credit. However, since your credit score is less-than-ideal, lenders might see you as a credit risk. Thus, you can expect more restrictive terms on your approved loan.
Lenders may not be flexible on their loan options and terms when you have bad credit. You may not have a say on how long you should be repaying the loan. The lender may set the predetermined period even if you don’t find it favorable. Besides that, you might be required with a higher amount of downpayment than less risky borrowers.
With bad credit, you have a smaller chance to get fair and favorable terms, especially with traditional lenders, such as banks. Because their qualification standards are often high, it’s either you get rejected or get stuck with their restrictive terms.
Higher Interest Rates for Your Loan
Another significant effect of borrowing money or taking out a loan with bad credit is being charged with sky-high interest rates. Any loan you will be qualified for will likely be at a premium. Since lenders will view you as a riskier debtor, they will make you pay more for the loan by imposing a higher interest rate.
Note that an interest rate difference of a single percentage point can have an enormous impact on your finances. If the cost of your loan is higher, your debt will also increase. Because you’ll be putting more money toward paying your loan, you’ll have less money available for other expenditures. It can even be more challenging for you to keep up with repayments.
Smaller Credit Limit
Whether it’s an auto loan, a mortgage, or a credit card account, a low credit score can make it harder for you to borrow the loan amount you need. Because the lender sees you as a higher risk of default due to bad credit, they can reduce the amount you’re allowed to borrow. Thus, you may not be able to get the funds you need.
Getting approved for loan with bad credit doesn’t mean you’re already off the hook. It can be more frustrating when you find out the maximum loan amount the lender is willing to lend you. Instead of having access to the exact amount of money that you need, you’re most likely to get stuck with a smaller credit limit plus expensive rates.
Other Possible Outcomes
Having bad credit has a domino effect on other aspects of your life, such as housing opportunities, getting a cell phone contract, and even getting a job. If you’re applying for a position that involves handling money, employers are more likely to run a credit check before offering you the job.
When you’re planning to buy a home and even when trying to rent an apartment, bad credit can be a significant concern. Banks and landlords will typically obtain your credit report to evaluate your ability to make payments on time.
These are just a few of the possible consequences of having bad credit. It doesn’t only lead you to higher interest rates and fewer loan options but can also make it harder for you to acquire certain services.
If you don’t want to experience these unnecessary troubles, it’s essential to take your credit seriously. You can start by taking a look at your credit report and know where you currently stand. By doing this, you have more time to repair or improve your credit without having to deal with these negative outcomes.