All the wrong decisions of your life have consequences.
Eating an ice cream while having a cough can lead to a fever. Going out with wet hair in winter rain can cause terrible cold. Driving over the speed limit on city roads can lead to a penalty. Not repaying your loan on time can decrease your credit score.
And it is not that you are not aware enough. You mostly ARE in your senses while taking a wrong decision. It is just that you chose to ignore the repercussions even when you know them.
The optimism in our lives leads us to focus on the pros related to a certain decision. We chose not to pay attention to the negative side and move ahead.
But know this: every bad decision on your part regarding a debt will lead to long term consequences for you. Your finances could suffer terribly and you could be drowned in penalties and charges.
The effect of having a bad credit is mostly monetary. You should realise just how bad it is to have a poor credit score. Here are some downsides that every borrower with a blemished credit report has to face.
- Rejections from credit applications
Having a bad credit score is like having a terrible body odour, that makes people stay away from you. The loan lenders maintain their distance from those who do not have a good credit.
Your credit report is the first thing every lender goes through when you apply for a loan or any type of credit. And your application is rejected in this initial step only, if your history shouts out that you are not a reliable person to lend money.
Let us try understanding the perspective of the lender. Put yourself in a lender’s position. Let us say your friend borrowed your clothes for an occasion, but failed to return it due to whatever reason. With this history, how bent would you be in lending your dress to the same friend next time?
That is exactly how your credit report works with the lender. This makes it very necessary to not play around while returning what you borrow.
- Higher Rates Offered
Higher risk involves higher costs. A lender earns money when he risks it while lending to you. And when you already have a history of not being able to return the money on time, the risk in lending you money automatically becomes high.
While most traditional sources will downrightly reject your loan application on seeing your poor credit score, those which offer you loans for bad credit will charge you a higher rate of interest. This applies to banks, online lenders, and credit card and utility companies.
High-risk applicants with no guarantor are subject to heavy interest and charges to balance the risk. This means you borrow money only if you are in absolute need that you go to the extent of paying high interest amount.
- Loss of Opportunity Costs
In layman’s terms, opportunity cost is what you lose out when you chose the alternative option. For example, when you chose to have cheese in your burger instead of mayonnaise, you miss out on enjoying a mayo burger. Or, when you spend your last €100 on a blue gown, you miss out on buying the €100 watch that you fancied so much.
And when you chose to do something else over maintaining a good credit score, you miss out on a lot of financial opportunities that could have fallen into your pocket had you had a higher credit.
You could have enjoyed privileged credit card offers, reward points and perks if your credit card application had not been rejected due to a low credit score. You would have been offered a discount and some other deals while buying your new car on seeing a good credit score.
In short, you could have saved a lot of money and enjoyed other perks too if your credit rating had not gone sour.
Building up your score
Now when all has been said and discussed, you should be told about remedial action too. Credit ratings are not just one-way street. They can fall and they can grow. While bringing your score down is easy, building it up might not be so much.
The easiest way, though, would be to take 12 month loans available online, and repay them responsibly. The online lenders offer loans to people with bad credit in a convenient way and they are very easy to handle. Even if you do not need the extra money, use it for the repayments itself.
You can choose an amount that you can afford. Your instalments can be whatever you can smoothly accommodate in your monthly budget.
A responsible behaviour in the repayment of an instalment loan will make a positive impact in your credit report. You can easily repeat this to build your credit score.