What is A Poor Credit Score?

poor-credit

What is considered a poor credit score? What leads to a poor credit? A credit score is the most trivial part that a lender considers before approving a loan. The credit score represents how financially responsible a potential borrower has been in the past. A poor credit score is usually regarded as FICO scores below 650.

What Does Poor Credit Affect?

The poor credit score shows that you are not responsible enough to handle your finances. It speaks out more than your finances. Your poor credit score is used to judge your overall sense of responsibility. It can not only ruin your chances of getting approved for a loan but this poor credit score will have also pose threat to other areas of your life.

1. Career
A potential employer might reject you on the basis of your poor credit report. They usually review your credit history, including the amount of debt that you have accumulated.

2. Home
You might miss out on the chance to get a brand new apartment or house because of a poor credit score. The landlords review it to understand whether you would be able to pay rent or mortgage. To reduce the risk, a landlord might want a security deposit for security.

3. Security Deposit
Similar to the landlord, a lot of utility companies might ask you to give a security deposit. The cell phone company, Electricity Company or the cable company. These types of companies usually go through the credit history. If they find your credit score not up to the mark, they may ask you to provide them with a security deposit during registration.

4. Cell Phone Contract
A cell phone companies tend to check your credit history. If you haven’t been paying the bills on time, there are high chances the company will reject your contract.

5. Automobile
When you are applying for a loan the bank or lender will check the credit history. A poor credit score has low chances of approval. Luckily, if you do get approved, the interest rates are going to be relatively high.

6. Starting Your Business
Entrepreneurs with a great idea and poor credit score aren’t going to be able to fund their startups. Lenders take the credit score too seriously because they use it to evaluate your ability to actually run the business effectively. If you do get approved, the limit you can borrow regardless of a great business plan and idea.

Poor Credit Scores Explained

How Did You Get A Bad Credit Score?

Here are some reasons for a poor credit score.

1. Late Payments
Consistency paying your utility bills or credit card bills can decrease your credit score. Being unable to pay your bills on time represents your irresponsibility with finances. In addition, when a lender views your credit history in the future, they’ll notice your habitual late payments, which will decrease your credit score.

2. Defaulting
Paying the bills after the due date is one thing, but defaulting from a loan is entirely different and much worse. The loan defaults when you are unable to pay for a long period of time. Once your credit has been marked with defaulting, the credit score is inevitable going to take a dive in the wrong direction.

3. Charge-offs
A charge-off is a lot like a default. We discussed this aspect in the previous articles. Your credit accounts are marked with a charge-off, which refer to the inability of the borrower to return the amount. A charge of can significantly damage your score.

4. Collection
Sometimes the lender is unable to default the loan, in such a case, they hire a third-party collections agency. This agency has been tasked with the sole responsibility to retrieve the amount. Under these circumstances, your credit account has been marked under collections. This damages not only your credit score but also your personal life. The collection agency resorts to other means like threatening lawsuits at your place employment.

5. Bankruptcy
If your financial situation is so dire that you are unable to pay the loan and are forced to file for bankruptcy, the credit score will surely drop. This is the worst cases scenario for a credit score. A lender will be able to spot a bankruptcy in your credit history for the next ten years, when it is removed.

6. Foreclosure
If your home is under foreclosure, a lender will view this as a high risk factor. A series of late payments which led to a foreclosure will without a doubt decrease the credit score. Sadly, the foreclosure will remain a part of your credit history for a while too. So, this will definitely make it harder for you to rebuild the credit score.

7. Judgments
Overall, judgments are always viewed negatively. This is because you are forced to make payment by the court. Furthermore, failing to make these payments is going to decrease your credit score. Suffice to say, unpaid judgments will just ruin the already damaged credit history.

Factors Worth Considering

Maintaining positive credit utilization is beneficial because it shows how responsible you are with the finances. A diverse set of credit accounts that are well managed will bode well for you. However, you shouldn’t max out on all your credit cards or make one big purchase after the other. It could decrease the credit score.

Review your credit history at least once a year. There might be possible discrepancies in the recorded transactions. The discrepancy can be easily resolved by submitting a complaint to the consumer financial protection bureau.

Always prioritize the payment of your open credit accounts. This should trump all other payments. Delaying the payment of your credit to use the money for clearing another debt is not recommended. Missing out on a credit payment for 30 days can be a huge blow to your credit score.

To conclude, you should be careful with your spending, in order to improve the poor credit score. Additionally, once the credit score improves, it is your job to keep it that way. Continue spending and managing your credit accounts wisely.

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