Your credit score is an integral part of your financial life. Having a good credit score can give you access to better interest rates, easier approvals and also give you more negotiation power. Having a bad credit score can have a massive impact on your financial life and it can be harder to get accepted for a range of loans, credit cards, or mortgages. Whilst these options may be the most obvious, there are also a number of other ways in which a low credit score can affect your financial life. Let’s take a look…
What is a bad credit score?
There’s not a specific number relating to a bad credit score, because each of the credit referencing agencies use their own scoring system. What one company sees as ‘bad’ may be ‘fair’ to another company so it’s hard to pin a bad score down. However, based on your history of borrowing, you may find yourself with a low score. Factors such as missing payment or making late repayments, having high levels of debt, incorrect details on your credit file, having CCJs and defaults or declaring bankruptcy can all have a detrimental impact on your credit score.
Ways that a bad credit score can affect your financial life
A low credit score can have a number of repercussions on your financial life and the chances of getting loans or finance in the future.
Fewer finance approvals
When you apply for any type of loan or bad credit car finance, lenders will usually want to perform a credit check on you before thy decide whether to offer you finance or not. Lenders want to know what type of borrower you have been in the past and if you can be trusted to meet your repayment deadlines. If you have had trouble in the past sticking to your agreement terms, you can be seen as more of a risk to finance lenders and they may not want to lend to you. Having a bad credit score can mean you are less likely to get accepted for a range of finance products.
Higher interest rates
If you are lucky enough to get a car finance approval, you may also face higher interest rates. Lenders usually reserve their best rates for people with good credit scores as they are less likely to default on their loan. You may face higher interest rates on bad credit loans as you are more of a risk to lenders. Lenders make money on the interest rate they offer and if you are more likely to default on a loan, they can make more money in interest.
Deposit contribution
It can be possible to get finance and loans with no deposit but having a deposit to put down can be beneficial. If you have bad credit, it can help to increase your acceptance rates. This is because the more you put in, the smaller the loan amount will be which can work in your favour. It can also help to reduce your monthly payments and the interest rate offered.
Joint application
If you’re struggling to get approved for finance, you may need to apply for finance with someone else. You can shop around for loans with a guarantor or provide a joint finance application. A guarantor is when a friend or family member agrees to make your repayments if you fail to do so. From a lenders point of view, they are essentially having two guarantees that the loan will be paid back so can help to increase your acceptance rates. A joint finance can be used to get a car loan. This is when two people, usually a couple, agree to make the repayments on the same vehicle. A joint car finance application can be good if you are struggling to get approved with bad credit, but you have good income, your partner can then prop up your application with their good credit score and help you both to get approved together.