Your credit score is an estimate of how risky it would be for credit providers to loan you money. This is called your "creditworthiness". A poor score means you're unlikely to get loan offers, because credit providers will think that (i) you might get overwhelmed by existing debts, (ii) you might not be prioritising your loan repayments and fall behind on instalments, and/or (iii) that you would be irresponsible with their money. You may feel that this is not a fair assessment of your credit behaviour and trustworthiness, but the fact is that credit scores are an important source of information for credit providers, so it's important to understand the downsides of a poor score.
What are the risks?
Having a poor credit score leads to several risks and disadvantages. These include:
- Higher Interest Rates: Because lenders would regard you as a riskier prospect, they'll charge you a higher interest rate to compensate for that risk. Higher interest rates mean that you'll pay more for your credit.
- Loan and Credit Denials: If lenders decide your credit score is too low, you'll face rejections when applying for loans, credit cards, or other lines of credit. This can make it challenging to manage financial emergencies or take advantage of financial opportunities.
- Difficulty Renting Homes: Many landlords conduct credit checks before leasing to a prospective tenant. A low credit score can result in your rental applications being rejected. If your credit score is poor, you might have trouble finding a place to rent.
- Higher Insurance Premiums: Some insurance companies use credit scores to determine premiums. A lower score could lead to higher auto or home insurance costs.
- Security Deposits: Utilities and service providers may require higher security deposits from customers with poor credit scores.
- Employment Challenges: Certain jobs, particularly in finance or government, may require credit checks. A poor credit score can potentially limit your employment opportunities or promotions.
- Limited Access to Financial Products: Poor credit can limit access to financial products like personal loans, credit cards with rewards, or low interest rates, impacting your ability to manage finances effectively.
- Stress and Emotional Impact: Dealing with a poor credit score, given all the above downsides, can be stressful and lead to anxiety and a sense of financial insecurity. A poor credit score is one of the many causes of financial stress.
What can you do about a poor credit score?
Knowing and understanding your credit status is vital, especially if you are going to be applying for any kind of finance in the future. There are many tools to retrieve your credit score, but at Debt Sage, we not only give you your credit report for free, we also help you understand its implications. Use our free credit report tool to get an in-depth view of how much debt you have and what your creditworthiness looks like. And once you know your credit score, follow our action plan to improve your credit score.