Monday, May 4, 2009

Detrimental Affects of Bad Credit

It is not a very uncommon concept that bad credit can have detrimental affects on the financial life of a person. There are various ways in which a person can be affected with a bad credit.


1. Not qualifying for large purchase loans: Apparently there is no such thing as ‘minimum credit score that qualifies you for a loan’. It depends on the lender if he is to allow you a loan with your credit score. Different lenders have a different idea of a good credit score. However a FICO credit score above 650 is considered good.

Having a bad credit may deny you simple loans such as home loans, car loans etc. It can further have adverse affects as it may even make purchasing a difficult task. Even purchasing furniture and electronic entities can become tough.

2. Less chances of qualifying for credit cards: One of the major determining factors for the issue of credit cards to an individual is his credit score. A bad credit score will not qualify a person for more credit cards. A person with a bad credit score is assumed to have bad credit worthiness and hence is not allowed more credit cards.

Applying for too many credit cards may just creep in to the credit report as inquiries which are bound to reduce the credit score to a further bad figure.

3. Higher interest rates: If, however, you have been allowed a loan in spite of having a bad credit score, do not consider it as a problem solved. You may be charged extravagant rates of interest on the loans you make. A person with a good credit score will be paying a much lower interest rate. The difference is huge. A person with a good credit score may be paying an interest of 10% per annum as compared to a person with a bad credit who pays an interest at 20% per annum. Exorbitant interest rates can further leave a big stigma in your credit report if the interest is not paid on time.

4. Limited credit limit: A bad credit record will hamper the credit limit to the fullest. This can affect the purchasing power of the credit card holder. The debt should not exceed more than 35% of the total available credit on the credit card. This helps keeping in check the expenses and does not contribute to a bad credit rating. Credit utilization is hampered by a rise in balances with the same credit limit which further goes down in the credit report as a negative remark.

5. Paying hefty insurance premiums: With a bad credit, one may be paying hefty insurance premiums. Some insurance companies also take into consideration an applicants credit score in order to judge if the person will make a high number of insurance claims in the future. Fewer incidents of auto accidents have been reported in case of individuals with good credit as compared to those with bad credit hence insurance companies look up a persons credit score before accepting the application for insurance. These days however ‘insurance score’ is being considered by more and more insurance companies. But still a credit score of 650 plus can help you cut down more than 15% on the insurance premiums.

6. Renting space becomes difficult: A bad credit makes it difficult to rent office space or an apartment. A bad credit implies that a person would be lousy in paying the rents on time and has a low trustworthiness. It becomes difficult to lease a retail or home property as you may be subject yourself to higher deposits or higher rent amounts or an altogether denial of lease.

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