A. A bad credit rating can cost you. It can result in denied loans or an increase in the interest rates and insurance premiums that you pay. It may even affect job applications.
Credit ratings are used to evaluate your creditworthiness. In general, lenders look at the amount of debt you carry, your ability to repay it and your history. Generally, the more debt you have, the higher risk category you are assigned. If you have a history of late payments, or more serious problems such as a court judgment against you or a personal bankruptcy, a lender may consider you to have a very high risk of default and may choose not to lend you money.
However, some lenders will accept higher-risk clients -- at a cost. According to Fair Isaac and Co. (FICO), the originators of the credit scoring system, a person with poor credit (a FICO score below 620) who is accepted for a mortgage may have to pay hundreds of dollars more in interest charges on a 30-year fixed-rate term than a person with an excellent rating of 720 or above. There are also sub-prime loans designed for people with bad credit. These have higher interest rates and charge more points, and often there is a higher penalty to repay the loan early. Borrowers with bad credit ratings need to beware of predatory lenders who charge exorbitant rates and fees.
Mortgages and personal loans are not the only places you will pay for a bad credit rating. Insurance companies and auto loan lenders may use your credit score to help determine your policy rate or the interest rate of your car loan. Along with your claims history, some insurers see a poor credit rating as a sign that you are more likely to claim damages. And if you plan to buy a car, a poor credit rating could rev up your interest rate to over 200 percent more than that of a person with excellent credit. A persistent history of missing credit card payments could also impact your job prospects, as some employers check the credit rating of applicants.
The good news is that a bad credit rating isn’t permanent. While it may not be quick, if you pay your bills on time, pay down your debt and don’t apply for new credit or debt, your score will gradually improve and so will your prospects.
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