Looking out for your financial future
Bad credit. If you’ve ever looked at applying for some kind of finance then you’ve likely heard the term thrown around. So, what’s all the fuss about? Well, the fact is – managing credit poorly can have severe consequences for future you.
Why? Well, because finance companies report your behaviour to credit bureaus. If you’ve been good and made your repayments on time, then great! This will be reflected in your credit score. However, if you’ve missed payments and gone into default, it will be negatively reflected in your credit report and this will lower your score.
Your credit score is one of the most significant pieces of financial information companies will review when assessing your application. So, having a good score is pretty important! A low or bad credit score will often mean you are not seen as ‘credit worthy’ and may lead to you being declined for finance.
It’s not just traditional finance companies that affect and review your credit scores though. The types of companies that access and influence your score are wide-ranging, from telecom to utility providers. So, the consequences of a bad credit score may reach further than you think.
In this article, we’ve outlined the main problems people face when they don’t manage their finances properly. Keep reading to see how bad credit could impact you and how Tippla might be able to help you get your finances back on track.
5 Ways Bad Credit Could Impact You
1. Loan applications might not be approved.
Having a low credit score can and will impact you financially in more ways than one. Yet, this is probably the biggest issue for most people. Bad credit can affect your chances of qualifying for a new loan or credit application. This is because lenders might consider you a high-risk borrower if you have a low credit score.
Your credit score is an indicator of how likely it is you’ll be able to repay a debt, with a low score indicating you’re less likely. A lender will see this as ‘high risk’ and may not be willing to approve your loan application as a result.
What you can do to improve your chances
If you want to improve your credit score so that you can qualify for a loan, the key thing to do is keep your finances in order. If you share a bank account with your spouse, you can decide to separate your finances to ensure it won’t affect your credit score.
On the other hand, if you are a couple and buying a house together, you can buy the home using the name of the person with the best credit. The other option you can consider is finding a co-signer with a good credit score. For instance, some parents may co-sign on their children’s loan or mortgage application to improve their chances of getting better lending terms.
The other way you can positively influence your credit score is by paying all your bills on time. This includes your utilities, phone bill, rent, and so on. If you are late on any payments, you should try and make them current to improve your credit score. You can request a free annual copy of your credit report to see where you stand. That way, you will have an idea on what you can do to improve your credit score. You also need to ensure there are no errors on your credit report as this can hurt your credit score.
2. You’ll likely face higher interest rates.
Qualifying for a short-term loan can feel amazing. Yet when your loan comes with restrictive terms or a high-interest rate, it could soon dull your spirits. The more high risk you are, the more likely your loan will be expensive. By having bad credit or a lower credit score, you may end up paying higher interest rates when you get approved for a loan. A lender will use these to offset the risk, which may lead to pricey monthly payments.
The impact of having bad credit can be enormous, especially when applying for a mortgage. For example, if you have a low credit score or bad credit, your mortgage lender will likely request for a down payment of at least 15 or 20%. This is commonly referred to as “predatory lending” when lenders charge a high-interest rate after you are turned away by several lenders. That’s really the issue with bad credit – you don’t have any bargaining power when dealing with creditors.
How you can combat this
To qualify for better interest rates when applying for a loan, there are a few things you can do. For starters, you can make multiple monthly payments on your card to keep balances down. Alternatively, you can increase your credit card limit. When your balance stays constant and your limit increases, you ultimately reduce utilisation. You can also consider applying for a debt consolidation loan to streamline your card balances into one, improving your credit score.
You should also resist the temptation of applying for a new credit card to avoid accumulating debt. Your credit score will suffer the moment you start making late repayments. It could take months or even a few years to improve your credit score, which means getting a new credit card is not worth it.
If you experience difficulty making ends meet, you can contact your lenders or find a legitimate credit counsellor. While this won’t improve your credit score immediately, if you can make timely monthly payments on your cards, your score should improve over time. Seeking financial advice from a credit counselling service could also help guide you in the right direction if you’re looking to improve your finances long-term.
3. Insurance premiums will be more costly.
Sadly, bad credit can often lead to higher insurance premiums. Insurance companies typically run a comprehensive credit check when you apply for insurance cover. Your credit history helps to give insurers an overview of how you have managed your finances over the years. Insurance companies are often on the lookout for any red flags that may indicate that you are not qualified to be insured.
If you have missed on several card payments or you’re deep in debt, for instance, that could indicate you don’t have your finances in order. So, having bad credit could cost you more in premiums or result in your claim being rejected altogether.
In most cases, bad credit won’t ultimately hurt your chances of getting approved for life insurance. Yet, it may make your insurer think twice about whether you’ll be able to make your premium payments on time.
How you can tackle this issue
Sometimes bad credit might be a result of errors on your credit report, and not from poor financial sources. Therefore, before you start looking for the right insurance cover tailored to your needs, it is essential to scrutinise your credit report for any inaccuracies. If you notice something looks incorrect, initiate a dispute with the relevant credit reporting agency that made that report. They can help you resolve that matter, and that might raise your credit score.
If you want to consider filing for bankruptcy, you may have a difficult time convincing the insurance provider to offer you an insurance policy. In such a scenario, you need to work on improving your credit history before getting an insurance cover. You can apply for insurance once you make positive steps toward repaying your debts.
4. Starting a business could prove more difficult.
If you have bad credit and you want to start your own company, it could throw a spanner in your business plans. Unless you have financing to start with, chances are you’re probably going to need to apply for a loan. This is where things get a little tricky. Getting approval on a loan, whether it’s from the bank or an online lender, is likely to be much harder.
Most lenders classify someone with a credit score less than 622 as too risky to lend to. Most, but not all. There are lenders out there that specialise in bad credit finance and may have more lax requirements. Some people can start a business with bad credit, so you shouldn’t assume that it’s something impossible to do. Ultimately, it may just make things a lot more challenging, especially if you don’t have experience in running a business.
Improving your situation
To minimise the challenges of starting a business with bad credit, the first step is finding out how you’ve got here. If you have been spending more than you earn, then you might want to consider budgeting. You need to be responsible with your finances to avoid overspending.
Next, estimate how much you pay for expenses such as groceries, gas, and entertainment. Based on your income, create a limit of what you spend every month. For instance, if you usually spend $300 a month on groceries, you can cut down the cost to $200 a month on groceries by using coupons and avoiding impulse purchases. Budgeting can improve your credit score, and this can improve your chances of getting a loan to start your business.
Since most creditors are usually unwilling to lend money to people with bad credit, you may also want to consult a financial expert. Showing them your business plan will give you a better understanding of where you stand. A financial expert can advise you on some of the changes you may need to make to improve your credit score. Plus, they’ll likely be able to guide you on how you can get money to start a business even with your bad credit.
5. You may have trouble getting a mobile phone contract.
Getting a mobile phone contract may sound trivial compared with some of these other points. Yet, since mobiles are such an everyday staple of modern life, most people can’t afford to live without one.
Unfortunately, most phone providers have to scrutinise your credit when determining if you are eligible to get a new contract. Even when you apply for a month to month mobile phone plan, your provider will likely run a credit check. This is important because it’s quite easy to accumulate excessive charges on things like roaming, high data usage, and international calling.
What you can do if this applies to you
If you don’t qualify for a phone contract due to bad credit, you may still have options but they can be costly. Some mobile phone providers may accept a security deposit similar to applying for a secured credit card. If you make your repayments on time, you can get back your deposit after a year or two. You could also consider getting a prepaid phone, though such plans usually don’t include state-of-the-art phones. They might also have restrictions on data usage and talk time.
The other option you can consider is applying for specific contract packages designed for families. In this scenario, multiple phone lines are connected on a single plan. One main account holder will have to undergo a credit check, but the rest of the users connected on the plan will not. The main risk of getting this contract is that the responsibility for paying the bill solely depends on the primary account holder. That said, it can be a great way to get a good deal on a phone plan since it won’t be influenced by your poor credit history.
Dealing with bad credit
If you’re deep in debt and feel that you cannot solve the problem on your own, you should consider using the services of an expert in debt relief. They can give you guidance on what you can do to improve your condition.
Remember, it’s easy to get into debt. The trouble is, it takes much longer to bring your score up than it does to drag it down. But regardless of how poor your credit is at the moment, you can always make it better.
You may have overlooked the importance of creating a budget, and ended up spending more than you should. In hindsight, maybe you didn’t need that expensive big screen TV after all. Or, maybe you’ve ended up in a difficult financial situation due to factors beyond your control.
Whatever the case, stay positive! You can definitely turn things around for the better and speaking with a professional is a great way to get started.
Tippla – for smarter credit checks
Feel like bad credit is holding you back? What if we said you could improve your credit score AND it didn’t have to cost you anything? That’s what you get when you sign up to Tippla!
By comparing your score from multiple credit reporting agencies, we’ll help you understand it more deeply so you can improve your score and reach your financial goals. For smarter credit checks, choose Tippla.
While we at Tippla will always do our best to provide you with the information you need to financially thrive, it’s important to note that we’re not debt counsellors, nor do we provide financial advice. Be sure to speak to your financial services professional before making any decisions.