Having a low credit score is not the end of your financial freedom, however - it has the following disadvantages when it comes to your financial situation
Having a low credit score is not the end of your financial freedom, however - it has the following disadvantages when it comes to your financial situation:
- Loan approval will be more difficult
- If the loan gets approved, you will be charged higher interest rates as well as more
- restrictive terms on the approved loan
- Trouble renting an apartment
- Trouble getting a job or security clearance
- Trouble getting a cellphone contract
- Higher insurance premiums
FICO credit scores are grouped into five different categories:
Determine whether your credit score ratings in South Africa is classified as good or bad using the guide below:
- Exceptional credit: 800+
- Very good credit: 740 to 799
- Good credit: 670 to 739
- Fair credit: 580 to 669
- Poor credit: 579 (and below)
Lenders will check your credit report first when you approach them to apply for a loan. What is a credit report? Well, a credit report is a record of your financial habits when it comes to borrowing money. The report includes the total amount you have borrowed, as well as if you have paid it back on time.
“After analyzing the above list of credit scores categories, you will be able to determine whether you have good or bad credit. Having bad credit is usually a result of a lack of repayments with regards to debts you owe to lenders or other financial institutions, who will place a mark on your credit report”
A lack of repayments could be any of the following:
- The monthly repayments have not been made on time
- The payments have been avoided entirely
- You have been declared bankrupt by lenders or financial situation
With that in mind, let’s explore the do’s and don’ts when it comes to applying for finances when you have a low credit score.
A low credit score is not necessarily bad
You may be asking yourself - How can I get a loan with a low credit score or what credit score is needed for a loan? Thankfully, there are ways to still get credit with a low rating:
Personal loans, specifically designed for people with unfavorable credit histories, are available. However, lenders who offer these specialized loans usually charge higher interest rates, because of their willingness to take a bigger risk than usual risk based on the people they are lending money to. They will also consider your overall income as well as your ability to pay the loan back.
Here are a few things to consider when it comes to applying for a loan with a low credit score:
- Paying back the loan should be your number one priority to avoid paying numerous interest rate repayments.
- Stick to applying for one loan at a time. Applying for multiple loans at the same time using different providers could cause suspicion as you will appear to be a “risky” borrower in the eyes of lenders. Learn more about having mutiple loans at the same time.
- To avoid disappointment, ask your chosen lender about the option of a "soft enquiry". This allows you to see how likely you are to qualify for a loan before you apply.
- Taking out a loan whilst having bad credit could further damage your overall credit score if not paid back on time.
- However, if you take out a loan for bad credit and you are consistent with your payments on time, it can aid your overall credit rating. It shows lenders that you are responsible when taking debt upon yourself, whilst also being trustworthy enough to provide you with the loan.
You’ll Be subjected to higher-than-usual interest rates
If you manage to get your loan request approved, you will most likely be subjected to high interest rates. This is a result of having a low credit score, which makes you a risky lender in the eyes of financial institutions – which warrants the higher rates in their eyes. The higher your interest rate on your loan, the more your repayments will be, and as a result you could end up paying more towards the higher interest rates than you would for the loan in itself.
You will be limited to lower lending amounts because of having a low credit score
Every lender will have different limits on the amount of funds they will be allowed to allocate to your request as a result of your low credit score.
Consider signing up for a credit card before applying for a loan
This might sound crazy, but hear us out. Applying for a credit card or a personal loan to pay back bad credit can end up improving your credit score. As a result of securing a credit card you will decrease your credit utilisation ratio, whilst also having the opportunity to prove your credit and trustworthiness to lenders and financial institutions again by making consistent payments on time. Learn more about Personal Loan vs Credit Card: Which is Better?