When you apply for a loan, a mortgage, and even cell phone services, lenders and other service providers prefer you have a good credit standing. Having good credit ratings or an excellent credit score is something to be proud of. In the US, only 59% of Americans have a score of at least 700, which is considered good.
To avoid falling into the other 41%,, you need to be responsible and mindful of all your financial decisions, which is more often, easier said than done. There will come a time that you’ll need extra cash for emergencies and you’ll soon realize how good credit scores will affect the way you can borrow money. With that said, here are some disadvantages of not taking care of your credit reputation:
Higher Interest Rates
Lenders use your credit score to determine the likelihood you will default on your loan. It is where they base how responsible you are in your financial obligations, especially your debts. A person with a bad credit score is considered a higher risk than a person with a good credit score.
Lenders often charge a high interest rate to mediate some of the risk they are taking to grant you a loan despite your credit record. You will pay more interest rate over time than you would if you have good credit.
Possible Rejection of Loan Application
Most of the time, individuals with a bad credit score get rejected on their loan applications. Having bad credit will limit your option in lenders and loan options. Due to the limited options that people with bad credit have, they tend to accept higher interest rate loans for bad credit borrowers.
Most loans, such as a home loan or a car loan, need a credit score of at least 620. Borrowers who have a lower credit score will be rejected. A 620 credit score is considered good credit, and a score of 700 and above is considered an excellent credit score.
Can Attract Scammers
As mentioned above, there are only limited options for a borrower with a bad credit score. Therefore, scammers will take this opportunity to advertise bogus loan offers to attract bad credit borrowers.
These criminals are always on the lookout for a possible victim, and when they see one, they will do their best to lure them so they’ll take the bait. The next thing you know, you have already been victimized by these opportunists.
To avoid being a victim of loan scams, make sure to do thorough research and look for red flags. Though these redflags are apparent, many expert scammers play their cards smoothly, and they will lure you into agreeing with their compelling words.
Will Lower your Score Further
If you already have a bad credit score, applying for another loan will lower your score even more. Every time you apply for a loan, the lender will conduct an inquiry on your credit records, namely a hard inquiry and a soft inquiry.
Though a soft inquiry will not affect your credit record, a hard inquiry does. Whenever a hard inquiry is being conducted on your credit record, it will appear on your credit report, which will affect your credit score.
The lender commonly makes a hard inquiry to the borrower’s credit record during the lending decision. The most common loan options that require a hard inquiry are home loans, car loans, and credit cards. If you already have a bad credit score, borrowing money will impact your credit score and lower it even more.
You are Going to be Deep in Debt
Having a bad credit score means that you still have existing unpaid debts- and here you are applying for another one. If you borrow money with unsettled past debts, you will be deeper in debt. If this happens, you will struggle to pay all of your debts, and the interest rates will accumulate over time.
You do not want to ruin whatever reputation you have left in the financial world. Layers of debts will give you a bad credit record and you might face a lawsuit if the debt collector decides to sue you. Being responsible for your financial obligations will steer you away from this stressful situation.
All of the disadvantages mentioned will be avoided by only one thing: maintaining a good credit score. If you can do this, you will have more freedom in the financial world. Maintaining a good credit score also means that you are organized enough to pay your debts religiously, which reflects how you manage your finances.