What Does Bad Credit Actually Mean And How Does It Affect You?

Credit is something a lot of us still don’t understand, even though it can have a big impact on our lives in general. As a matter of fact, it was estimated that two-thirds of all Brits had absolutely no idea what their credit score was. This is pretty alarming, especially when considering the importance of credit, not only when it comes to financing, but day to day financial transactions and contracts as well. Let’s take a look at what bad credit means exactly, how it affects you, and a few tips to help you correct the situation.

What is Bad Credit?

Some people will assume that they have “bad credit” even though they have no idea what that actually means. The first thing you have to know is that there’s not a single universal “bad credit” score. All credit reference agencies have different criteria to judge credit, and a particular score could be considered bad with one credit agency and not so bad with another.

The three major credit agencies are TransUnion, Equifax, and Experian. TransUnion ranks credit scores from 0 to 710, Equifax from 0 to 700, and Experian from 0 to 999. The lower the credit score, the worse the credit.

For Experian, anything under 720 is considered poor. A score under 560 will be considered very poor. With TransUnion, it’s 565 and 500, respectively. Equifax will consider scores under 379 to be poor and 279 to be very poor. Also note that scores will be different across agencies, not only because of the criteria they use but because certain providers won’t report to all of them. However, as a whole, these should be fairly consistent.

Another thing you have to understand is that credit reference agencies are not the sole determiner of how good your credit is. You can also have an informal credit score with any institution you’re working with. If you get financing from them or a credit card, for instance, and were always good on them, your institution might give you opportunities you wouldn’t get elsewhere because of the good relationship you have with them.

How Does Bad Credit Affect You?

Obviously, having poor credit will make it harder for you to get financing for things like a mortgage, personal loan, or a car loan. But it can go much deeper than that.

For instance, having bad credit could affect your chances with landlords when submitting applications. They will routinely run credit checks on applicants to make sure that they’re trustworthy because that’s really how credit checks are often being used. Some employers will even look at a person’s credit score before hiring them to see if they would be a good choice. However, you should know that they can’t do so without your permission.

Another way that credit scores can affect you is when it comes to utilities. Some companies will refuse applicants who have bad credit scores, so that could be a major issue. Also, you should be prepared to pay higher fees and rates if you do end up qualifying for a credit card or a loan.

What Are the Common Reasons for Bad Credit?

Bad credit scores are usually a result of bad or insufficient credit history. Having a bad credit score because you have no credit history can be particularly frustrating. However, it’s understandable since lenders have absolutely no idea if you’ll be able to keep up with your payments and if you’re a risky customer.

The most common cause for bad credit scores is missed or late payments. Know that it can take only one missed payment, no matter the size, to cause a significant drop in your credit score. If you have a credit card, it’s advisable to pay it in full every month. If you can’t, then you should at least try to pay the minimum.

If you’re forgetful and often miss payments because of this reason, there are things that you can do. For instance, you can set up automatic payments and pay on paydays instead of due dates. If it’s for a credit card, you could decide to pay a fixed amount each month.

Another thing that will affect your credit score is if you go over your credit limit. This is one of the worst things you can do and a sign that you don’t have enough control over your finances.

County court judgments and bankruptcies are another thing you don’t want to see on your report. This is when a lender goes to court, and a judgment is struck saying that you owe money. From then, you should do everything that you can to repay this debt in a month or less. If you don’t, this will be on your credit report for a total of six years.

Then you have things that are a bit more complicated, like credit utilisation ratio, for instance. Your credit utilisation ratio is the amount of credit you use vs. the total credit you have available. The higher the ratio, the worst it is for your credit score. That’s why you should not overuse your cards and try to only use a few of them.

You should also note that making credit applications can also affect your credit score, but not as much as other factors. However, you might find it harder to get accepted if you make multiple requests for credit around the same time.

What Can I Do If I Have Bad Credit?

The good news is that everyone can improve their credit situation if they take the proper steps. The very first thing you have to do is get a copy of your credit report. Every Brit is entitled to one statutory copy of their credit report from all three major credit referencing agencies for £2. You then have to make sure that you check for irregularities.

There are some cases where a simple error could have a serious effect on your credit score. For example, it might be an account that was paid off or closed a long time ago. If you notice any errors, it’s important that you report them immediately. Each agency will have a clear procedure to dispute entries, so make sure that you follow them and get false entries scrubbed out quickly.

The next step is making sure that you repay the accounts you do have open. You also have to make sure that the repayment will be reported to the credit agency, and make sure this is written down on paper.

There are tons of other things that you can do to either establish or improve your credit. If you want more tips on how to do it, this post might help. New Horizons is a broker team that helps people with a bad credit score qualify for loans for bad credit scores. They have all sorts of tricks that you can use to increase your credit score, like using good debt and checking you are on the electoral roll, among other things.

Conclusion

Understanding your credit is essential, and knowing how it works could be your key to financial freedom. Make sure that you take the steps necessary to know your exact credit situation, and come with a clear plan of action to correct it.