Bad credit can have many consequences for your financial life. Bad credit means that a person has a poor financial history which means that they regularly fail to pay bills on time and are expected to fail to do so in the future as well, or they owe too much money. It means a low credit score like under 580 on a scale of 300 to 850. Companies can also have bad credit scores based on their payment history and current financial situation.
Even though checking your credit score every day isn’t necessary, you shouldn’t ignore it either. It’s crucial to clear all your dues on time and keep your credit card debt low to boost your credit score and save your entire financial life from crumbling.
Some factors that lenders consider before accepting a loan application include proof of income, employment history, housing history, investment statements, debt-to-income ratio, and recent payment history. A bad credit score impacts all these factors and makes it difficult for you to get your loan application approved. It can affect all types of loan applications including, personal loan applications. Therefore, maintaining a good credit score is crucial. There are various companies that help you improve your credit score to get your loan application approved faster. Nectar is one such company in New Zealand. They also offer an online loan repayment calculator (https://nectar.co.nz/calculator/) to help you adjust your finances accordingly. However, it is better to maintain a good credit score yourself instead of borrowing.
In this article, we will discuss the various reasons bad credit can, directly and indirectly, affect your loan application.
How Bad Credit Directly Affects Your Loan Application?
1. You are considered a risk by mainstream lenders
Creditors are only willing to take a certain amount of risk, and people with bad credit can be a huge risk for them. Therefore, mainstream lenders have rigorous standards for determining who gets a loan and who doesn’t.
Banks and other money-lending organizations want to know how likely you are to pay them back. All types of loans including, car loans, mortgages, or credit card loans, are difficult to get approved with a low credit score. Lenders check your credit score through providers like FICO and VantageScore.
How Bad Credit Indirectly Affects Your Loan Application?
Bad credit can affect other aspects of your life. Let’s take a look!
2. High Insurance costs
If you have a big credit card bill or fall behind on your mortgage, you would have to pay higher insurance rates. Insurance companies view your credit reports and use a proprietary credit-scoring system to determine rates. Some life insurances companies don’t use a credit scoring process but, it is difficult to obtain their best rates with bad credit.
Uninsured assets are not viewed positively by money lenders. Moreover, high insurance costs due to bad credit can appear on your credit report and can make it difficult for you to get your loan application approved.
3. Fewer renting options
Bad credit makes it difficult to rent houses. Landlords also measure your ability to pay rent on time based on your credit score. Therefore, a credit report is often a part of your application when planning to rent a place.
If you borrow money to pay rent, it will also appear in your credit report and will reduce your credit score. Overall, a bad credit score means fewer housing options, and the inability to afford decent housing means difficulty in getting your loan application approved.
4. Difficulty landing a job
Companies ask for references and run credit checks on their potential employee. For specific management roles (where people are supposed to handle money), companies want to make sure that the new employee can be trusted with difficult financial decisions. Bad credit reflects poor money handling and affects your ability to earn money.
Being unemployed is not viewed positively by money lenders. They find it too risky to lend a loan to someone who has no source to pay it back. Therefore, difficulty in landing jobs can affect your credit score and can affect your loan application.
5. Paying a deposit for utilities
Bad credit can be a hurdle when trying to get an account with a utility or an internet company. Customers with a bad credit score are expected to pay a deposit before setting up an account, as insurance for failure to pay bills in the future. Even cell phone service providers don’t look favorably upon a bad borrowing history. They also ask for either a deposit or suggest a prepaid plan.
All in all, it can become difficult to get basic utilities, and the inability to do so is alarming for the banks and mainstream lenders when they view your loan application.
The Wrap Up
A bad credit score can have various consequences. It means that a person is unable to pay bills on time and will continue to do the same in the future. Several companies calculate your credit score for you. Banks and other mainstream money lenders use your credit score to approve or disapprove your loan application. If you have a history of not paying bills on time, lenders consider it a risk that you won’t be able to pay them back as well and reject your loan application. B
ad credit also affects other aspects of your life. For example, it can become difficult for you to hold a job, rent houses, or pay for utilities, and the insurance costs go up. All these factors are used to calculate your credit score, and the resulting low credit score can negatively affect your loan application.
Table of Content
- 1 How Bad Credit Directly Affects Your Loan Application?
- 2 How Bad Credit Indirectly Affects Your Loan Application?
- 3 The Wrap Up