What is a bad credit score and how does it affect you?

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Whether you apply for a home loan, personal loan, or credit card, your credit score can have a significant impact on whether or not you are approved as a borrower.

Why is my credit score so important?

Your credit score is a three-digit number calculated using information from your credit report. When you apply for a new line of credit, a creditor can use your credit score to determine:

  • If you can afford to repay a loan.
  • Your solvency or reliability in repayments.

Generally, the higher your credit score, the easier it will be for you to get approved for credit. A higher credit score can also help unlock other benefits, including lower interest rates and more favorable terms compared to other borrowers with lower scores.

On the other hand, a bad credit score is a red flag for most lenders and credit grantors. If you apply for a loan with a low credit rating, you can expect to pay a higher interest rate than the market average. Some creditors might even reject your credit application altogether if your credit score does not match their eligibility criteria.

What is considered a bad credit rating?

There is no universally accepted definition of a bad credit rating. In fact, each lender has their own classifications for what they consider to be bad credit and how it impacts your eligibility for a credit product with them. That being said, you can get a fair idea of ​​bad credit scores by looking at the credit scoring system used by the two major credit bureaus, Experian and Equifax.

Credit score strips Equifax Experian
below average 0 – 579 0 – 549
Average 580 – 669 550 – 624
Good 670 – 739 625 – 699
very well 740 – 799 700 – 799
Excellent 800 – 1200 800 – 1000

Source: Experian.com.au, Equifax.com.au.

As shown in the image above, the Experian and Equifax credit scoring system is divided into five levels:

  1. Excellent
  2. very well
  3. Good
  4. Fair
  5. Poor/below average

Generally, an Experian score below 550 and an Equifax score below 510 are considered bad. Anything below 400 is exceptionally poor.

How does a bad credit rating affect me?

Lenders look at your credit report and credit rating to assess the risk of lending you money and whether you will be able to repay the borrowed money or not. Generally, a higher credit score makes it easier to approve financing and credit products. Conversely, a less than ideal credit score can set off red flags for the lender and make it difficult for you to be approved or obtain favorable loan terms.

If you’re wondering how you can get bad credit, it can be the result of missed repayments, defaults on payments, and even errors in the information on your credit report. That’s why it’s important to check your credit score regularly to keep an eye on your financial health.

You should also review your credit report at least once a year, and before applying for any credit, to get an idea of ​​where you stand. If you find that your credit score is lower than you expected, double check the entries to identify any errors or discrepancies. If you find incorrect information on your file, contact the respective credit bureau to have it removed from your file.

In addition to checking your credit report, you can make positive lifestyle changes to improve your credit score. As part of the comprehensive credit reporting system, positive and negative information is listed on your credit file.

Positive information includes paying your bills on time, settling outstanding debts, and reducing a credit card limit. Negative news includes delayed or missed repayments, defaults on loans, and applying for multiple credit products in a short period of time. So even if you’ve made financial mistakes in the past, taking positive steps like reducing your debt and paying your bills regularly will help improve your credit score. You can also read this article for simple tips to repair and maintain your credit.

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