How a bad credit score can affect you

Quick insights

• Poor credit may limit you from getting favorable loan terms or a credit card that you want.
• Credit scores aren’t the only factor that lenders consider when determining your eligibility for a line of credit.
• You might be able to improve a low credit score with regular, consistent habits such as making payments on time and in full.

Credit score models often have credit scoring ranges that go from poor to exceptional. If your credit score falls in the poor category as referenced by some models, you might feel this is "bad credit." While there is technically no definition of a "bad credit" credit score, in this article the term "bad credit" refers to low credit scores.

The potential disadvantages of having bad credit

A low credit score does not inherently mean you are “bad” at credit, but it’s a snapshot of your creditworthiness to lenders. Your creditworthiness is largely determined by your ability to repay debts, such as towards your credit card balances and loan installments.

A poor credit score may indicate that you have poor credit history and you may face disadvantages, such as:

• Difficulty obtaining loans (including mortgages) or credit cards. Even if you’re approved for credit while having a poor credit score, you may receive low credit limits.
• The potential for higher interest rates on loans and credit cards.
• The potential for difficulty getting approved for rental applications, as landlords often check credit history.
• The potential for higher insurance premiums, as insurers consider credit scores when determining rates.
• Limited access to premium cards, which could mean fewer options to earn rewards on purchases.

Habits that could lead to debt and poor credit

Bad credit and excessive debt don’t necessarily happen overnight. There are some habits that you may not realize you have which may result in debt and a low credit score.

Some of these unhealthy habits could include:

• Overspending and living beyond one's means.
• Not budgeting or tracking expenses, potentially making it difficult to manage finances effectively.
• Not making your credit card payments or loan installments on time.
• Not understanding or reading credit terms and fees, resulting in unexpected charges and penalties.
• Co-signing loans without considering the risks and potentially being held responsible for someone else's debt.
• Not prioritizing debt repayment, allowing interest to accumulate and prolonging the debt repayment process.

Your credit score is built upon several factors that touch on these different practices. For example, payment history is a major part of your score, so if you fail to make your payments on time, your score could decrease. Additionally, if you have a habit of spending a lot using your credit card, you could be negatively affecting your credit utilization ratio, which is calculated by taking the amount you spend and comparing that to your total available credit. Adding up all these habits can lead to a poor credit score and additional debt.

Getting your credit back on track

No credit score is permanent. If you have a poor credit score and you’re hoping to improve it, there are several healthy habits you can start to implement. These include:

• Reviewing your credit report for errors and reporting any inaccuracies to the credit bureaus.
• Paying bills on time and, if possible, in full to establish a positive payment history.
• Reducing credit card balances to lower credit utilization ratios; it’s recommended to use about 30% or less of your total available credit.
• Avoiding new credit applications to prevent further hard credit checks on your credit report, which can temporarily hurt your credit score.

It takes time to rebuild credit, so remember to be patient and consistent with your new approach.

The value of credit

Establishing a good credit history early on can help you unlock financial opportunities in the future. It takes time to establish a good credit score, and if you’re not careful, a few bad habits (or even small missteps) can cause it to decrease. By creating a routine of regular on-time payments, reviewing your credit score and maintaining a healthy credit utilization ratio, you may be able to rebuild your credit.

Credit scores are just one factor that lenders consider when determining your eligibility for credit, but they can also help determine how much credit you receive and the interest rates that come with the terms. With a good credit score, you could potentially save in interest costs and open doors to different credit options, such as premium credit cards.

In conclusion

A bad credit score can affect you in several different ways. It may limit your ability to get access to lines of credit or, if you do get approved for credit, it could come with high interest rates. Remember, your credit score isn’t the only factor that determines your eligibility for getting credit. It also does not necessarily imply you are “bad” at credit if your score is low. But it does indicate that some changes may need to be made if you want to help improve your chances for approvals in the future.