Those who are financially savvy will understand the importance of having an excellent credit rating. Having a good credit rating shows potential lenders that you are likely to pay back loans on time, so you will have more options regarding the kind of loans you can access.
Many things can lower - or boost - your credit score. Certain factors, such as frequently missing bill payments and being declared bankrupt, can reduce your credit score. Not sure what your score is? Well, it is time to find out! Check your current credit score and keep track with tools like Credit Sesame where you can get updates and alerts on your current score.
If you have a low credit score, then that can be a massive hindrance in many ways. Here are some of the ways having a low credit score affects your finances.
High-interest rates
Some lenders may approve you for a loan even if you have a bad credit score, but they’ll charge you high-interest rates, in comparison to those who have better credit scores. This means that you’ll pay more money back over time and the more you borrow, the more you’ll pay in interest. This is quite frustrating, especially if you want to pay off your loan as soon as possible.
Bank application rejection
As having a low credit score deems you a ‘risk’ to lenders, some lenders will outright refuse to lend to you so your application will be denied. This can be a setback for some who need to borrow money for important matters.
Security deposit on utilities
Utility companies - such as electricity, gas, water, etc - check your credit score and if your credit score is poor, then they will request that you pay a security deposit upfront.
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Higher insurance premium
Insurance companies look at prospective applicants’ credit scores. The lower the credit score, the higher the insurance premium because insurance companies believe that a lower credit score correlates with higher claims filed.
Denied employment
Some jobs - especially ones in the finance sector - check candidates’ credit scores before proceeding with the next stages of the application process. If your credit score is low, then you would be rejected from the job role.
You might struggle to get a cell phone contract
If you want to buy a phone on a contract instead of pay as you go, then you will have your credit score checked because phone companies need to be sure that you will be reliable and able to pay your monthly bills. A low credit score means that that you’ll have to pay upfront or not have a contract at all.
Issues starting your own business
Depending on the type of business you intend to run, you may require startup loans but if your credit score is low then it’s highly unlikely that you will be approved for a loan, even if you have a stellar business plan and data projecting financial success.
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Difficulty buying a car
If you’re looking to purchase a car on finance, then you’ll probably have difficulty doing this if you’ve got low credit. Chances are, bad credit will mean that you’ll be rejected for a car loan, or you’ll be approved for a car loan with a very high-interest rate.
Property rejection
If you want to buy a property in future, then it’s imperative that your credit score is excellent, otherwise, you could find yourself rejected for a mortgage. The same applies to renting a home or apartment. If you’re looking for a place to rent and you want to sign for a place, it’s not just enough to have a security deposit and first month's’ rent - you need to have a good credit score too. Landlords and estate agents check before renting out to a prospective tenant and if you have a low credit score then they will reject you. This is because they deem those with a low credit score as unlikely to pay on time - this is why it’s important to always pay your bills on time.
All in all, having a low credit score has a detrimental impact on your finances. If you want to increase your credit score over time, then you’ll need to be financially responsible.
- Remember the credit scores and what counts as good or bad. A score of 649 or lower is poor or very poor, a score of 700-749 is good and a score of 750/800+ is excellent.
- Pay your bills on time.
- If you have any debts, make it a priority to pay those off as soon as possible. If you are struggling to pay off debt, then you can seek help and support.
- Register at on the electoral role at your current address.
- If you have a credit card, make sure you that you pay it off in full.
- Don’t make multiple applications for credit.
- Don’t take financial risks that could be detrimental to your credit score in future, such as taking out payday loans.