Bad credit leads to a low credit score. This is used as a reference by the financial institutions while making their lending decisions. Here, we’ll walk you through some of the major disadvantages that you may have due to bad credit:

1. Getting a job becomes a challenge

During your job interview, your potential employer probably won’t just ask for a list of references. The company may also seek your permission to run a credit check. This happens in the case of certain roles, which includes positions in management. 

Usually, this is to know whether the person being interviewed can be trusted for making financial decisions. In a survey done in 2016, nearly 29% of employers revealed that they run credit checks. So, it is important to remember that bad credit may also limit your ability to get a job.

2. Difficulty in getting a loan

Now, this must not come as a surprise. Banks would definitely want to know the chances of you paying them back. This is of great importance to them before they decide to give you a loan. A credit score shows how good you are with your payments. 

A low credit score would make it difficult for you to get a loan or a credit card. A credit score that’s between good and excellent is generally preferred by many banks and other financial institutions. If you don’t qualify, you’ll have to settle for a loan with high-interest rates.

3. Lesser options in renting

Borrowers are not the only individuals who need to worry about bad credit history. Your bad credit might also trouble you if you’re trying to rent a home. Many of the landlords would want to know your ability to pay them on time. For this purpose, they’ll obtain your credit report. 

If you’ve made some blunders in the past, getting a new home can be tough. If your credit history doesn’t look convincing, the landlord may demand a higher security deposit.

4. Trouble in setting up utility accounts

When you’re trying to set up an account with a utility company, your bad credit would become a hurdle. Before signing up, customers with low credit scores might have to pay a deposit. Even starting your service with a cellphone provider can be difficult with bad credit. 

If you don’t have a good credit score, you might have to opt for a prepaid plan. It’s also likely that you’ll have trouble qualifying for attractive deals on the most sought-after cellphones.

5. Higher costs of insurance

Certain types of insurers might take a look at your credit reports. If you have bad credit, there are chances of you being at fault in an accident. This is their general assumption. Life insurance companies don’t generally use credit scores as a part of their underwriting process. However, if you’ve got a recent bankruptcy, you’ll find it harder to get a policy.

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The problem arises when the very convenience provided by a credit card is used to accumulate unnecessary debt. The average household with revolving credit card debt in the US had an average balance of $6,849 in 2019. Another $1,162 was owed in average interest every year. 

This kind of credit card debt can prevent you from saving for your future. To avoid this from happening, here are our suggestions for using your credit card sensibly:

1. Avoid opening too many credit card accounts within a short period

You’ll be offered lots of credit cards with attractive features by banks and credit card companies. However, opening too many lines of credit increases your chances of accumulating debt. More credit cards would mean more payments and the need to keep track of them. 

Besides, opening so many accounts within a short period can have a negative impact on your credit score. As a result, you may be denied credit for months. It is, therefore, extremely necessary that you don’t open too many accounts within a short period.

2. Understand the terms of your credit card

Don’t be in a hurry to make your first purchases as soon as you receive your credit card. Go through the details of the credit card agreement carefully. This will help you avoid any unexpected fees. Different types of credit cards have varying percentages of fees and interest rates. 

You must know when you’ll be charged a fee and how interest will be applied. It must also be known when the interest rates would increase. To avoid these things, choose a credit card that’s appropriate for your financial goals and spending habits.

3. Spend wisely

You must make sure that you’re spending within your means. With the help of your credit card, you can pay for larger purchases and build a good credit score. To make this possible, it is important to pay your balance in full every month. You must not use your credit card to buy things that you can’t afford. 

If you do, you’ll find it difficult to pay off the amount within your billing cycle. Only make purchases for the amount that you can pay off within the card’s billing cycle.

4. Make timely payments 

Along with paying monthly towards your credit card bills, make sure your payments are made before the due date. You must ideally pay in full. If this is not possible, pay as much as you can. Don’t just pay the minimum amount stated in the bill. Today, most banks allow you to set up automatic payments. This feature facilitates the transfer of a set amount to your credit card every month on time. 

Paying before the due date prevents additional fees from being charged on the late payments. If your budget allows, you can also make two or more payments every month.

5. Keep the utilization ratio low

If you’re not paying the balance in full every month, keep a low utilization ratio. For instance, let’s say you have a credit line of $6000. Now, if you’ve made $3000 worth of purchases on your card, the utilization ratio amounts to 50%. This high percentage of users would make it difficult for you to pay off the debt. It would be a lot better if you have a utilization ratio of 30% or less.

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It opens the doors to the lowest interest rates available on them. It’s not so difficult to improve your credit score. You just have to do some simple things in a disciplined manner. To help you understand this better, we’ve listed some of these steps here:

1. Aim for a credit utilization of 30% or less

There are some simple ways to control your credit utilization. One of them is to pay the balances of your credit card in full each month. Credit utilization refers to the part of your credit limit you’re using at a given time. After your payment history, this is the second most important factor affecting your credit score. 

Try keeping your overall outstanding balance at 30% or less of your total credit limit. You can then work towards bringing that down to 10% or less. This would be an excellent approach for improving your credit score.

2. Consolidate your debts

If you have several outstanding debts, it is advisable to go for a debt consolidation loan. Once this is done, you can pay off all those debts. This works to your advantage, as you’ll have just one payment to deal with. You can pay off your debts faster if your debt consolidation loan has a lower rate of interest. This can improve your credit utilization ratio, which would obviously enhance your credit score. 

Another great strategy is to use a balance transfer credit card for paying off your multiple credit balances. However, you must be aware of the balance transfer fees. It would cost you 3 to 5% of the amount of your transfer. One good thing about such cards is that they charge 0% interest on your balance during their promotional period.

3. Avoid late payments

This is another simple way to make your credit score better. Late payments must be avoided at all costs and there are some small steps you can take in this regard. One is to create a file to keep track of your monthly bills. This can be a paper or a digital file. You can set due-date alerts on your smartphone to know beforehand when a bill payment is to be done. 

If possible, you can also automate bill payments from your bank account. Another excellent option worth trying is to use a credit card to make your monthly bill payments. One thing to keep in mind is that you’ll need to pay the balance in full each month.

4. Limit your new credit requests

Application for some form of new credit results in a ‘hard inquiry’. An occasional hard inquiry doesn’t have much of an effect. It is many hard inquiries within a short period of time that damages your credit score. They can adversely affect your credit score for a period spanning a few months to almost two years. 

Let’s say you’ve made new applications for different credit cards within a short period of time. Banks might assume that you’re facing financial difficulty. They think that you’ll use all these new credit cards to pay off your existing debt. So, the banks would conclude that you’re risky for them. 

Make sure that you don’t apply for new credit for a long time after your previous application. This would help in keeping your credit score from going down.

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Landlords and insurance companies might also check your credit score. Your credit score shows how responsible you are financial. This information is then used for renting out an apartment or issuing an insurance policy. There are some key factors that affect your credit score. Let’s see what are they:

1. Payment history

There’s one question that lenders always consider before giving their money to someone else. The question is whether the borrower would repay the loan amount fully. Your payment history reflects everything related to your payments. It takes into account whether you’ve paid your bills on time for each account. 

Sometimes, there can be delayed payments due to certain situations. In this case, how late you’ve been with the payments is also considered. If any of your accounts have been sent to collections, it would also reflect in the payment history. It also takes into consideration foreclosures, bankruptcies, and lawsuits.

2. Length of credit history

Your credit score is also determined by how long you’ve been using your credit. Long credit history is always helpful if it doesn’t show any negatives, such as late payments. If you have a short credit history, that’s fine. The only condition is that you should be making your payments on time and your debt must be manageable. 

Experts of personal finance, therefore, recommend leaving credit card accounts open even if they’re not used. The account of that credit card would help boost your score.

3. Credit utilization ratio

You might be making your payments on time, but this doesn’t always give the true picture. There are other aspects of your accounts that the companies look at. Your credit utilization ratio makes it easier for lenders to understand how much debt you have. They determine this by comparing your overall debt to your available credit limits. 

An individual with a balance of $100 on a credit card with a $550 limit seems responsible. On the other hand, someone with $350 balance on a similar credit card would be considered risky.

4. A mix of different credit types

Another thing that’s considered while determining your credit score is whether you have a mix of different credit types. It means that you must have different types of accounts such as credit cards, instalment loans, and store accounts. 

This doesn’t mean that you must open new accounts just to increase the accounts in your credit profile. You don’t need to worry if you have lesser types of accounts. This is just a small component of your credit score.

5. New credit

The number of new accounts you’ve applied for recently is also considered while determining your score. Whenever an application is sent by an individual for a new line of credit, a hard inquiry is done. If you’ve opened several new accounts and their percentage is high, you’re considered a risky borrower. 

The lenders assume that you might be experiencing cash flow problems. Many people accumulate debt to ensure a good cash flow, which becomes a problem later on.

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