Having bad credit doesn’t make you a bad person. It doesn’t even mean that you are financially irresponsible. What bad credit does mean, though, is that you’re going to need to make some very specific decisions in order to navigate through the world. Your credit score will follow you around despite your best efforts to improve it, and you’ll have to take certain actions in order to become successful. In fact, almost every financial choice you make will have to be reconsidered once your score dips low enough. Below are just a few of the factors that will go into making major life decisions if you have a low credit score.
Preparing for Rejection
One of the real truths about having a bad credit score is that lenders won’t want to work with you. A credit score builds a profile of how trustworthy you are as a customer without actually taking things like the reasons for your late payments or your personality in mind, so having a bad score can make you look like you’re not going to pay back your debts. With that in mind, it becomes much more understandable that there will be some lenders with whom you just won’t be able to work.
As a note, you shouldn’t feel bad that lenders won’t work with you due to your credit score. There are plenty of lenders who only work with individuals who have near-perfect scores, which puts most consumers out of the running when it comes to borrowing from them. What you must understand as someone with poor credit is that even many of those lenders who work with those than less-than-perfect credit might still be a little hesitant to work with you.
You should be prepared for most of your credit applications to be rejected, but that isn’t actually much of a bad thing – a rejection is just a rejection. Unfortunately, too many credit checks over a short period of time can actually cause your credit score to drop even further. While it certainly doesn’t seem fair that those with bad credit scores should be punished for getting rejected again, it’s something with which you will have to deal with.
On the other, having the possibility of rejection looming over you means that you’ll both need to be more careful about when you apply for credit and do more research to ensure that you have a good chance of being accepted. You won’t just be able to apply for a loan because the terms look good – you’ll only apply if you know that the lender is willing to give loans to those who have credit scores similar to your own. Your job will be to reduce the likelihood of being rejected when possible and to avoid putting in applications at all if you know that doing so will further hurt your credit score.
Dealing in Cash
If you’re going to be rejected from using credit in many cases, your goal should be to start using cash whenever possible. Using cash means using the money that you already have on hand, which will, in turn, allow you to spend without going further into debt. There are relatively few entities that would rather have you borrow money than pay them upfront, so dealing with cash will actually allow you to accomplish some transactions much more easily. Getting to a place where this is viable for you, though, is going to require quite a bit of hard work and changing the way at which you look at finances.
The bulk of your financial life decisions will come down to whether or not you can make the payments today. That means that you’re not going to have the luxury of paying overtime and that you should only be making purchases that leave your bank account in a comfortable place. This doesn’t mean that you’ll be able to avoid every financial emergency but rather that you’re going to have to rely on both your savings and on the lines of credit to which you already have access when the unexpected does occur.
This also means that you’re going to have to start placing a premium on your savings account. Since you don’t have access to credit, you’re going to want to make sure that you always have a type of reserve fund in place. Having a few thousand dollars available on a credit card can be very helpful to those with great credit, but your goal is to have the same amount of money available in the bank. You should also use excess funds to work on improving your credit score, but you’re going to want to ensure that you have money put away for a rainy day.
Since your credit score is low, you’re going to have to become an expert on budgeting. If you know that you’re going to have a big expense coming up, you’ll want to start looking at your budget and deciding what you can move around in order to make sure that you can make the payments. Since you can’t count on a new credit card or a new loan to help you, you’ll need to be able to adjust your current money in order to successfully weather financial storms.
Finally, you’ll need to learn quite a bit about long-term planning if you are going to rely on paying in cash. If you want a new car, you’re not going to be able to go down to the dealership tomorrow and get a loan – instead, you might have to save up money for several months (or even years) to make your payment in cash. You’ll quickly become a professional at putting off unnecessary purchases and ensuring that all of your major expenses are actually worth what you are paying. Having a low credit score means really learning more about the value of every dollar you plan to spend.
Paying the Penalties
The good news is that having a low credit score is not always going to preclude you from getting loans or financing purchases. What it does mean, however, is that you’re almost always going to pay more for the privilege than some of your friends or family members who have higher scores. Again, it can feel very much like you’re paying extra when you’re already dealing with more financial difficulties, but this is simply the nature of dealing with lenders for whom credit scores are everything.
The first place you’re going to end up paying is with your interest rate. Generally speaking, even those companies who tend to serve low-credit customers tend to offer higher interest rates for a few reasons. First and foremost is because those individuals who have lower credit scores tend to present more of a risk on paper. There’s also the simple fact that those with lower credit tend to have fewer borrowing options, so the companies who are willing to originate the loans will typically feel less pressure to be competitive when they offer their loan terms.
At the same time, you will likely end up having to put down larger down payments when you do get a loan. Down payments are cash payments made in addition to the amount borrowed in order to both bring down the total amount of money lent and to put cash in the pockets of those who are making the transaction. Again, this is fairly understandable when you’re looking at things from a dispassionate standpoint – if you were dealing with someone who had a low credit score, you’d probably make very similar decisions in order to protect your financial well-being.
Looking at Improvements
Having a low credit score often also means having to pay more fees when you borrow. This is also something that comes down to a lack of competition – those companies that offer financing to individuals with higher credit scores know that they have to compete against virtually everyone, so they work as hard as they can to make their loans more attractive. Since your options are very limited when you have a low credit score, you’ll generally have to put up with paying higher fees just to be able to borrow the money you need. It doesn’t always seem fair, but that’s the nature of the business.
Taken together, this means that those with lower credit scores need to be prepared to spend more money when they choose to finance a purchase or take out a loan. This should make you think twice about borrowing when it’s not necessary and help you to better adjust your budget. The good news is that when you do borrow and make your payments on time, you’ll help to raise your credit score and your next loans shouldn’t be quite so costly.
As a person with a low credit score, you’re also going to spend an awful lot of time looking towards making improvements to your score, likely in a way that those with better scores will not find necessary. It takes much more effort to improve a credit score than to cause your score to drop, so you’ll need to be on a constant lookout to get yourself out of your credit hole.
The good news is that you’ll have plenty of opportunities to build up your credit. Multiple companies specifically work to give those with lower scores a chance to build their ratings back up, though you’ll spend a significant amount of time researching to figure out which of these companies are legitimate and which might not have your best interests at heart. You will want to constantly be on the lookout for methods of bumping your credit score up a point or so whenever possible, as passing new credit thresholds can have a major impact on your life.
Above all else, you’ll be in a position that requires you to be very careful about the debt that you choose to take on. Taking out loans or using a credit card might be helpful for your credit score in the long run, but you’ll have to be very diligent about making payments on time and ensuring that you’re not using more than you can afford to pay off. The most successful individuals with low credit ratings are those who are careful not to let their scores drop any further than they have already dropped – after all, doing so could just cause more problems.
Making good life decisions with a low credit score also means being willing to put off immediate gratification in order to bring your score up a bit. Putting more money into paying off credit card debt or bringing down medical balances can mean skipping vacations in the short-term, but it might make it easier to purchase a house in five or six years. Your goal as someone with bad credit should be to weather the storm in which you find yourself so that you can successfully find yourself on the other side once you have made a dent in your debt.
Making life decisions with a low credit score generally means being very pragmatic about the position in which you find yourself. You’ll have to get used to rejection, to paying more, and to using cash instead of easy lines of credit. You’ll also become far savvier about the importance of your credit score and learn to be very responsible with your money – both factors that can help you to become more successful in the future. Having a low credit score can be a temporary situation if you’re willing to work on improving your credit rating, so use this time to learn how to keep your credit in good shape.