Credit scores are like the equivalent of a GPA in the banking industry. Banking clients are given a specific score—grade, if you will—depending on how creditworthy they are. Some factors that affect the creditworthiness of a client include annual salary, existing credit limit, promptness on loan payments, and loaning history, among others.
What Are the Perks of Having a Good Credit Score?
Different institutions have varying standards on what a good credit score is. Generally, however, a score between 580 to 670 is tolerable, 670 to 740 is good, 740 to 799 is very great, and a score exceeding 800 is excellent. Clients with scores above 740 are frequent loaners that pay their monthly dues on time, all the time.
The better your grade is, the higher your chances are of securing the best loan terms available. Those with good credit scores will be able to negotiate on the terms to land a cost-efficient, low-interest, and flexible plan. You can use these loans to fund your business, purchase a house, or acquire a vehicle.
Other benefits of having a good credit score include:
Better Credit Card Plans
Clients with high credit scores who frequently take out loans are considered premium clients and may qualify for the more elite credit card options. These include accounts with lower rates, better rewards programs, and free miles.
The best way to increase your chances of qualifying for premium credit cards is to upgrade your existing cards regularly. It might cost a few bucks today, but once your score spikes, you’ll be able to get back all the money you spent and more.
Lower Rates on High-Value Loans
Even a small discount on high-value loans spread out over multiple years could add up to tens of thousands’ worth of savings. This is very beneficial for those planning to take out a large loan—property, business, or vehicle—loan in the next few years. Just imagine, if you get a meager 2% discount on a $1,000,000 loan, you’ll already be saving $20,000!
Better Leasing Options
Landlords that rent out high-value properties often check the prospective tenant’s credit score. Doing so is a good way to gauge their financial capacity. Plus, your landlord would want some form of assurance that you’ll be able to pay for dues one way or another in case worse comes to worst and you experience financial problems.
Can Qualify for Loans Faster
If the banking institution sees that you frequently take out loans and never miss payments, they’ll treat you as a premium client who can be trusted with multiple high-value loans. This means less waiting time during the application process. Clients with good credit scores can even qualify for a high loan in just 24 hours after submitting the application papers.
What is Considered Bad Credit?
It’s hard to universally establish what counts as a poor credit score because the actual value can be subjective. What might be a terrible financial situation for others might not be so bad for some.
For example, many low-income clients are happy maintaining a 600+ credit score. However, anything below 750 can also be considered terrible for those coming from medium- to high-income middle class households. It all really boils down to one’s needs.
If we’ll be looking at things from a banking perspective, however, then we can safely say that anyone with a score below 580 should seriously consider revamping their finances. At 580, you won’t even be able to apply for a decent credit card—much less a personal loan. Keep in mind that credit card accounts require clients to have a score of at least 650 to 670.
Now, this is not to say that clients with scores below 580 don’t have a shot at getting approved for a loan. Yes, they still do. However, one will likely be considered a high-risk applicant that needs to pay high interest rates and stick to a low credit limit.
Negative Effects of Having a Bad Credit Score
Having a poor credit score goes beyond not being able to get the credit card you want. If you are not deemed creditworthy or financially stable by banking institutions, you’ll have a much harder time with:
Getting a Business Loan
Sad news for entrepreneurs with poor credit scores: you won’t be able to qualify for a good business loan. Commercial banks are strict with these types of unsecured debt.
And efficient workaround here is to open a second mortgage. You can use your property as collateral for the business loan you want to take out. If you do so, then your chances of getting approved will skyrocket.
Just make sure you’ll be able to pay the dues. Otherwise, you’ll also be putting your primary residence at risk of foreclosure.
Applying for Premium Credit Card Accounts
The chances of someone with unpaid debts, a poor credit score, and multiple canceled credit card accounts getting approved for a premium credit card plan is nearly impossible. Banks won’t easily trust poor credit history clients with unsecured debt.
If you want, you can opt for subpar accounts that have high interest rates and low credit limits. They’re a terrible choice, but are still better than nothing. From there, you can start rebuilding your credit score by using your card frequently and repaying debt before they’re even due.
Finding a Place to Rent
Clients with poor credit scores and are looking for a new place to lease out might encounter a few issues. Many landlords do credit background checks. This is done to ensure that they won’t have trouble collecting rent in the long run.
However, you can still convince a landlord to accept you even if you have a poor credit score by:
- opting for pricey rooms that have a high monthly rent
- settling for subpar rooms in bad neighborhoods
- agreeing to pay multiple months in advance
- providing post-dated checks
Purchasing Your First Vehicle/Home
Unless, you can pay for the vehicle or property in cash, you’ll have trouble getting a banking institution grant you a loan for one. In fact, most commercial banks require applicants to have a credit score of 680. This is generally achievable for most middle class households that earn a bit above the recorded average median annual salary.
A good alternative here would be to apply for an FHA loan. These government-backed housing loans offer low down payment, low interest rate, and flexible repayment terms for all kinds of hombuyers—even those with poor credit scores. You only need a score of 580 to qualify.
For those who need to get a vehicle, we suggest looking at third-party private lenders that accept clients with bad credit scores. You may be able to get approved, but prepare for high interest rates and monthly mortgages.
Landing a High-Position Job
There are companies that do credit background checks on their applicants. This is done to ensure the company is hiring a financially competent individual they can trust to handle money and make wise decisions regarding corporate finances.
Plus, employers feel that people who aren’t financially stable are more likely to participate in illegal,fraudulent activities. Of course, the company simply wants to protect its assets.
5 Ways to Recover from Bad Credit
It’s not impossible for someone to bounce back from bad credit scores! Yes, the proess will be extremely difficult and time-consuming, but with consistency and patience, even someone below 580 can bump their score up to 800. Here are some tips to help you achieve this:
1. Determine Your Credit Score
People with poor credit scores often aren’t even aware of it. With all the accumulated debt, canceled credit cards, and existing loans, one won’t need a professional banker to tell them they have a poor credit score.
However, if you’re determined to overhaul your finances, you should start by checking your credit score. Knowing the exact number allows you to set a goal. For example, if you’re at 300, then you can strive to reach the 580 mark so you can at least be considered a good client.
2. Pay Off Your Debt
Before you even get started with the different credit score building techniques, the first thing you need to do is to pay off all your existing debt. This includes clearing credit card debt, catching up with the mortgage, and even paying off personal loans. Keep in mind that unpaid debt is very detrimental to one’s credit score.
3. Stray From Hard Inquiries
Until you’ve paid off all your debt, stay away from hard inquiries on products such as personal loans, credit card applications, and auto loans. Inquiring about these banking products and services while you have a poor credit score forces the institution to review and reassess your credit reports. Multiple poor reviews will simply reduce your current score even further.
4. Don’t Close Credit Card Accounts
Many clients that pay off their credit card debt opt to close their accounts. We get it, the feeling of financial freedom is so liberating that you wouldn’t even dare opening another credit account in your life, right? This is almost just as bad as not paying off your debt.
Remember: you need to use your credit card and pay dues promptly to boost credit score. Not using it at all—or worse, closing the account—deprives you of the chance to improve your credit report through regular transactions.
5. Apply for More Credit (Wisely)
Once you’re confident in your cash flow and have paid all existing debt, you can consider applying for more credit. Good payers that frequently apply for loans are often given the best deals.
Credit scores and employment
Surveys show that employers and companies are less likely to trust job applicants with bad credit reports. This especially applies to those gunning for high positions.
How bad credit affects one’s life
A bad credit score prevents one from applying for different banking products, strips away credit account perks, and forces institutions to deem the individual a bad payer and not creditworthy.
What do you think the quickest way to bounce back from a poor credit score is? Share your thoughts with us in the comments section below!