What Effect Does Credit Rating Have On a Borrower?
Credit rating can have a huge impact on many areas of one's life. Credit ratings are used to evaluate someone's creditworthiness. In general, lenders look at the amount of debt carried, a person's ability to repay on their debt, and a history of payment. A bad credit score can be costly. It can result in denied loans or an increase in the interest rates and insurance premiums that one has to pay. It may even affect an individual's ability to get a job.
Generally, the more debt a consumer has racked up, the higher risk category he or she is assigned. If there is a history of late payments, or more serious problems such as a judgment or a personal bankruptcy, a lender may refuse a loan because the applicant appears to be at high risk of defaulting on the loan. Some lenders might be willing to loan money to riskier applicants, but those loans come with a substantial price tag. According to the experts at Fair Isaac and Co., originator of the scoring system known by the acronym FICO, a person with less-than-stellar credit (a 580 FICO) who receives approval for a 30-year fixed mortgage pays on average $2,650 more each year (for a $100,000 loan) than someone with a rating of 720 or higher, which is considered an excellent credit score.
People with poor credit may be eligible for specially designed sub-prime loans. The catch there is that higher interest rates apply for these loans as well, and more points are charged. In addition, early repayment is often subjected to a higher penalty than with a prime-rate loan. Another consideration is that those with low credit scores have a target on their backs, visible to disreputable lenders who know that these borrowers are more likely to pay high fees and rates in order to secure a loan.
A bad credit rating can affect more than just the ability to get a mortgage or personal loan. Insurance companies may use a person's credit score to help determine the rate associated with his or her policy. Bad credit can serve as a warning signal that the policy holder might be more likely to claim damages. Therefore, insurance companies sometimes charge higher premiums on policies held by those with poor FICO scores, in a preemptive attempt to recoup anticipated loses. Auto lenders also may check credit scores to determine the interest rate on an applicant's car loan. Interest rates as much as 200 percent higher than average may await someone with poor credit looking to take out a car loan. Finally, a bad credit rating due to a string of missed credit card payments may negatively affect one's chances of landing a job, since credit ratings are checked by nearly half of employers in the US.
On the bright side, no one is stuck forever with a bad credit rating. Repairing the damage does take time, but paying bills correctly, reducing debt loads and staying away from new credit does bring credit scores up. Consumers can check their credit reports and scores and track their progress for free at LendingTree.com. No credit card number is required and there is no obligation to purchase anything.
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