I Have A Bad Credit Score, What Does That Even Mean?

“What does it mean to have a low credit score?”

Have you wondered why you were told that the reason your loan application is rejected is because you have a low credit score? Lenders put structures in place to assess the financial capacities of applicants. And one of such is credit score assessment.

What does it mean to have a low credit score?

Having a low credit score means you are in a bad financial position. A poor number indicates to lenders that you are struggling may not be able to repay your loans. This is why you must always keep your credit history sound and impressive. You should also keep your debts to the barest minimum. This way lenders will not reject your loan application.

Okay So What Does It Mean

So, let’s look at what the term “credit score” means. A credit score is a number that shows the creditworthiness of the individual by analyzing their credit history. In simpler terms, it proves how trustworthy an individual is with paying back debts and financial advantages given to them on credit. In Nigeria lenders get your credit score from your credit report which is made available by credit bureau. They source from your data from previous loan history.

A low credit score is the result of a person’s evaluation when the history shows loan default and inconsistent, loan repayments. When a person applies for a loan, the lender will evaluate them based on their past experiences with loans from other companies. If they discover that the applicant isn’t consistent with paying back their loans in due time, the lender gives a low score.

It also refers to a person’s history of an inability to pay bills on time, and that they are likely not to make timely payments in the future. This can be relatable with both individuals and companies as both can also have bad credit based on their payment history and current financial situation.

How To Measure Credit Score

Lenders look closely at a few important documents when determining whether you qualify for credit. These include transaction history reports, bank statements, utility bills, and maintenance receipts. They use these to consider your credit score and calculate by analyzing your financial actions, such as debt and payment history, to predict your ability to repay money lent to you. The higher the score, the better a borrower looks to potential lenders. A credit score is based on credit history, number of open accounts, total levels of debt, repayment history, and other factors.

An individual with a bad credit score would find it difficult to qualify for a loan. If your score is too low or if the lender observes that the frequency of default is high, it increases the chances of having your loan denied. And even if a lender approves your loan, they will likely charge a higher interest rate.

Many lenders evaluate a person’s credit score using certain variables here are certain variables. Lender rely on the FICO credit analysis to determine the credit worthiness of a person. It is very common in evaluating the credit score of a potential lender. They analyze it as follows:

(a) POOR – 300 to 579                      

(b) FAIR – 580 to 669                      

(c) GOOD – 670 to 739                      

(d) VERY GOOD – 740 to 799                      

(e) EXCEPTIONAL – 800 to 850                      

You can see that according to the FICO credit score analysis, a low score is ranging from 300 points to 579

Challenges Associated With Having A Low Credit Score

  1. Lenders will reject your loans applications more often than not. This is mainly because as earlier explained, you will pose as a threat to your prospective lender and as such, will be unfit for the credit facility

2. If you’re searching for a job or a grant, you may have some issues when a background check is carried out. They may not see your credit score but will get access to your reasons for having poor credit

3. Higher interest rates. In general, having a lower credit means lenders will charge higher interest rates to compensate for the risk. If you’re approved for a loan with a high interest rate, this can significantly increase your borrowing costs.

How To Avoid Or Improve A Bad Credit

If you have low credit (or bad credit), there are steps you can take.

(a) Set Up Automatic Debits from your accounts

Whenever you apply for a credit facility or a loan, request that the payment be debited from your account automatically. This will help ensure that you pay at least the minimum on time every month in the case of lack of self-discipline.

(b) Pay in full if you can

While you should always make at least a minimum payment. You can as well pay your loans in full every month to reduce your utilization rate, which is the percentage of your total credit limit you’re using. To calculate your utilization rate, divide your total credit card balance by your total credit limit. This is for those using credit cards.

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