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Most of us don’t realize it or don’t want to think about it, but subscribing to dozens of credits and letting the credit mount is extremely damaging for our credit rating. If you are one of those people who think that a low credit score is nothing to be concerned about, then you had better think again. From my personal experience of working in the financial industry for over four years, if there is anything I have learned then that is: “Avoid low credit score like the plague!”
What’s so bad about a low credit score you might ask. Actually, there is nothing right about having a low credit score. In this article, I will share with you 5 reasons why you should avoid a low credit score. Sure, having multiple credit card accounts and high credit limits is an amazing experience. But, before you know it you will be maxing out on those credit cards and won’t be able to earn enough money to make the payments.
Many people may ask me why they can’t simply control the urge to max out on credit cards and overdraft limits. The thing is you may be able to control an urge when you know about it, but you can’t do much about if you are fooled into spending. That’s exactly what lenders are doing. They are using people’s gullibility and lack of knowledge to fool them into spending more and more.
What Does a Low Credit Score Mean for You?
FICO is the agency responsible for assigning credit scores. Their credit scores are in a range between 300 and 850. The lower the credit score the higher the credit risk an individual carries and vice versa.
Let’s start by answering the question: “what is a bad credit score?”
Even though there is no floor set on what is a low credit score, every lender defines their own. Also, every credit product has a different cut off credit score. Generally, a credit score of less than 600 would be considered tipping the scale towards the lower side. Hence, a low credit score will be considered as a bad credit score because it means that you are a higher credit risk to the lender.
First, let’s look at the 5 basic reasons a low credit score can cost you big time. Then we will move on to discussing how you can possibly avoid ending up in this situation.
5 Basic Reasons to Avoid Low Credit Score
1. Higher Interest Rates: A low credit score means that you are a higher risk to any lender. To buffer for that risk, the lender will charge you higher interest rates. It is a fact that lenders charge lower interest rates from individuals that have a high credit score. If you have a low credit score, you lose your bargaining position.
2. Difficult to Obtain More Credit: Just, for the same reason, lenders may also decide not to approve of your loan applications. All this depends on your credit default history as well.
3. Rising Utility Costs: If you have persistently had low credit score in the past, utility companies may ask you to keep a security deposit. This is regardless of whether you have paid your past utility bills or not.
4. Employment Opportunities: Many companies check your credit history before hiring. A low credit score could mean that you won’t get the job that you had been awaiting for months.
5. Rising Insurance Premiums: Insurance companies also check credit before approving an insurance application. With a lower credit score, you will be charged a higher insurance premium because you are a higher risk.
Ways to Avoid Getting a Low Credit Score
If you genuinely want to repair and improve your credit report, then you will need to take some serious steps. To avoid getting into this situation in the first place, you need to take the following precautionary steps:
- When your credit card companies encourage you to spend more on your credit card because it will increase your chances of earning a prize, remind yourself that you have to pay the bill for it too. Remember that your chances of winning the prize are slim anyway.
- A high credit limit should not mean that you need to utilize it. It is supposed to be something to use on a rainy day.
- Control your urges to spend on things that you do not really need. A good way to do so could be by reminding yourself of the ramifications of a low credit score.
Chris Holdheide is a Senior Reviewer at Stumble Forward. He has been working in financial services for more than four years and has helped families emerge from their worst financial nightmares. His goal is to help other people avoid making the same financial mistakes that he made. He lives in Midwest, Ohio with his wife and runs a small manufacturing business. For more help on low credit score, log on to http://stumbleforward.com.