Your credit score is a three-digit number found on your credit report, calculated by credit reference agencies based on your credit details such as the amount of debt you owe, missed payments, the number of credit inquiries, and the like. This three-digit number is an acknowledgement of your past payment behaviour; of course, your credit score will be decent if you never abdicated responsibility, but that is not a common scenario in the world where the cost of living is constantly biting borrowers.
The following table demonstrates subprime credit scores from all credit bureaus – Experian, Equifax and TransUnion.
| Category | Experian | Equifax | TransUnion |
| Poor | 561 – 720 | 439 – 530 | 551 – 565 |
| Very poor | 0 – 560 | 0 – 438 | 0 – 550 |
A subprime credit score is never appreciated. Lenders will call your credibility into question and surmise that you will most likely commit a default this time, too. No lender would feel inclined to approve your application unless they are certain about your repayment capacity.
While a stable income source is deemed to offset the impact of having an abysmal credit report, the fact is that nothing can outweigh a decent credit file. Your credit score speaks volumes about your financial behaviour. It is likely that you have a propensity to ignore payments even though you are not cash-strapped.
The impact of a bad credit score on your loan options
A subprime credit rating is not acceptable. It will make it challenging for you to receive approval for a loan. Most subprime borrowers only manage to have a small loan application approved. These small loans are called emergency loans. They come with a paltry sum and therefore are required to be discharged in one fell swoop.
The repayment period of small emergency loans cannot be more than a month. In some cases, it is only 14 days. If your credit score is very poor, you are not eligible for instalment loans. You will only be able to qualify for small emergency expenses. However, most of the lenders will charge very high interest rates. Very bad credit loans with no guarantor from a direct lender will cost you very high interest rates.
Since these loans are repaid in full on the due date, it could be challenging to adhere to the payment schedule. Chances are, you fall into an abyss of debt.
Chances of credit approval are slim
Mainstream lenders will not sign off on your application when your credit score is abysmal. A very poor credit rating is normally the result of a county court judgment. Even if it is a satisfied CCJ, no lender will ever approbate your application.
Mainstream loan providers will most likely turn down your application. Applying for a credit card and a mortgage is highly improbable with a very poor credit rating. If you manage to secure an emergency loan, hard inquiries and defaults must be a few years old.
APRs will be outrageously high
The cost of the debt is not only determined by the interest that you pay on top of the principal. It is rather determined by the annual percentage rate (APR). The annual percentage rate also includes fees and associated charges along with interest rates. They reflect how much money you will pay down on interest if you accrue it for a full one year.
Small emergency loans come with a very high APR. For instance, the APR of payday loans ranges between 1,0000% and 1,500%. Lenders charge very high interest rates in order to compensate for the default risk.
Housing will be a challenge
If you are renting an accommodation, your credit report will be perused. A landlord will keep you in the loop about their plan to check your credit rating, but you have the right to refuse them. Bear in mind that most homeowners will never let you rent out their accommodations unless you permit them to check your credit report. They would want to do it to know you will run rent on arrears.
Some homeowners might still be accepting you as their tenant if your credit score is not extremely poor, but when it comes to taking out a mortgage, the scenario is not so simple. No lender would be able to approve a mortgage if your credit score is not up to scratch. If your credit score is not extremely poor, you might be accepted by mortgage lenders, but not banks. However, you will need to meet certain terms and conditions:
- You will need to arrange a larger deposit. Subprime borrowers are expected to put down at least a 20% deposit.
- You will be charged high interest rates.
- The repayment length of a mortgage will be small.
Getting a mortgage is generally a lot harder to qualify for when your credit score is not up to snuff.
What are the other impacts of a bad credit score?
Here are the other impacts of a bad credit score:
Lower employment opportunities in the finance field
Some vacancies are available only for those whose credit report is stellar. For instance, you cannot be hired for a job as a cashier if your payment record in the past is not impressive. A history of defaults and bankruptcy could lead to rejection of your job application.
Higher insurance premiums
If your credit score is not stellar, you will end up paying high insurance premiums. Auto insurance and home insurance companies will go through your credit report to decide on the premium. No doubt, you will have to pay a higher premium if your credit score is not stellar.
The final word
A low credit score is never appreciated. It will never allow you to qualify for a loan at lower interest rates. You will struggle to qualify for a mortgage, an auto loan and instalment unsecured loans.
Most of the lenders sign off on small emergency loans, but they charge very high interest rates. You should be careful about your repayment capacity while using these loans, as they can throw you into an abyss of debt.
