Your credit score is the most crucial thing in your finances. Therefore, you should protect it and avoid having a bad credit score as much as possible. Your credit score will be considered bad if it falls under 670 on a scale of 300 to 850.
Having a bad credit score can have a wide range of consequences. For example, it will make it harder to acquire financial services on good terms. It can also affect your chances of having good employment and getting a home.
So, you should avoid making bad debt and financial decisions that cause your credit score to plummet, such as the following:
Failure to Pay Loans
The most significant cause of having a bad credit score is the failure to pay any loans you acquire or, in short, defaulting on loans. Once your loan defaults, it’ll be automatically sent to the debt collection agency, which will be tasked to collect the payments from the borrower.
Once this happens, your failure to pay your loan will be reported to the credit bureaus, which will result in your credit score dropping. When you pull out a copy of your credit history, the loan default will reflect on the history.
You have to remember that the impact of loan default on your credit score is long-term. It is there to stay for many years.
A late payment is another leading cause why a person’s credit score will drop. Thirt-five percent of your credit score is affected by your credit history. If you make regular late payments on your loan, credit cards, and other financial obligations for more than a month, your credit score drops significantly.
The creditor will also report this kind of action to the credit bureaus and will be included in your credit history. Whoever will inquire into your credit records will see the late payments reported. As a result, financial institutions will become doubtful of your capacity to pay back a loan if you will acquire one.
Filing of Bankruptcy
When a company or a person can not pay their debts anymore, they need to file for bankruptcy whether they like it or not. Filing for bankruptcy is the best you can do to have legal protection. In the financial world, filing for bankruptcy is a huge event for a person or entity.
Bankruptcy can help you get out of your financial fiasco. But as a result, it will become a red flag for everyone to know that you’re a financial risk. It’d be best if you avoid this from happening.
Applying for Too Many Debts in a Short Period
If you have been doing your financial homework, the number one piece of advice you can constantly read is not to take on debts within a short period. It can be a loan or a credit card. Applying for too much credit within a short time will hurt your credit score.
Every time you apply for credit, the provider will conduct a hard pull on your credit record. This hard pull will reflect on your credit history, thus decreasing your credit score. One of the reasons why lenders or creditors conduct a hard pull on your credit record is to know how many debt services you’re applying for within a specific timeframe.
Consider this. A new credit application makes up 10% of your credit score. Therefore, the more you apply for credit, the more your credit score will decrease.
However, a hard pull will only last two years on your record. After that, it will be gone, and your credit score will become better. Therefore, it’d be best if you attempt to apply for another credit once the previous one is taken off your record.
Charge-offs also have an impact on your credit score. Once a creditor decides to charge off your account, they have already given up asking for your payments. As a result, it’ll stain your credit score significantly.
You have to understand that loan default and account charge-off are different. If a loan defaults, the borrower has failed to make payments many times over a long period but can still possibly be paid by the borrower.
On the other hand, account charge-off means that the creditor no longer expects that the borrower will comply with their demands and pay off the debt. However, both scenarios will hurt your credit score pretty severely.
The Bad Effect of Having a Bad Credit Score
A bad credit score can still be restored. However, you’ll need to spend so much time and effort to be able to do that. In addition, you must consider that you might need financial services, which may be difficult to acquire if you have a bad credit score.
One of these financial services is a loan. When applying for a loan, the number one requirement is a good credit score. Although there are options available for bad credit individuals, like CreditNinja’s bad credit loans, it’s still better to apply with a good credit score to get better deals.
Additionally, having a bad credit score will also lead to difficulty finding housing. Sometimes, it can also affect your job search.
The best thing that you can do is avoid being in situations that affect your credit score. However, to do that, you must be responsible for your debt and finances. Remember, having bad credit will limit your chance of obtaining a good service and better life.