The punishments and disadvantages of having a bad credit score

Just like your physical health is important for your overall well-being, your financial health is important for a secure future. One factor that quietly but significantly impacts your financial health is your credit score. 

Often unseen and misunderstood, a bad credit score could be a hidden burden, making it harder to get the things you need financially and leading to unexpected problems.

For example, you’ve worked tirelessly to save for a down payment on a house, only to be denied a mortgage due to a low credit score. Or maybe you’re facing an emergency car repair, but your loan applications are met with unfavourable terms due to the same reason.

These are just a few examples of how a bad credit score can silently hold you back.

Your credit score, often referred to as a credit rating, is a three-digit number that acts like a financial fingerprint. It silently tells lenders, landlords, and even some employers a story about your financial history – how well you manage your credit, your ability to repay debts on time, and your overall financial responsibility.

So, how exactly can a bad credit score punish you financially?

We’ll break down the factors that can lower your score, explain how it can affect your financial opportunities, and most importantly, equip you with actionable steps to build a strong credit history and unlock a brighter financial future.

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What is a bad credit score and a good credit score?

Your credit score is a three-digit number typically ranging from 300 to 850. But where exactly does the line get drawn between good and bad credit? Here’s a breakdown:

Excellent credit (800+): This is the top tier, indicating exceptional credit management. Borrowers with excellent credit qualify for the best interest rates and loan terms, saving them money on borrowing.

Very good credit (740-799): This is still a strong score, offering access to favorable interest rates and a wide variety of loan options.

Good credit (670-739): This is a healthy score, allowing you to qualify for most loans and credit cards, although interest rates might be a bit higher than the top tiers.

Fair credit (620-669): You may still be able to get loans and credit cards, but interest rates will likely be higher because lenders see you as a somewhat risky borrower. You might also be rejected for certain financial products.

Poor credit (580-619): This is considered a weak score. Obtaining credit becomes more difficult, and interest rates will be significantly higher, making borrowing much more expensive.

Very poor credit (Below 580): This is the bottom tier. Lenders view you as a very high risk, and obtaining credit becomes very challenging. You might be denied loans altogether, or only offered them with extremely high interest rates and unfavourable terms.

What can lead to having a bad credit score?

Just like taking care of your body with healthy habits is essential for good physical health, managing your finances responsibly is key to building a strong credit score.

On the other hand, just as unhealthy choices can affect your physical well-being, certain financial mistakes can lead to a bad credit score.

Here are some common culprits that can bring your score down:

Missed or late payments

Making late payments on any bills hurts your credit score, just like anywhere else in the world. In Nigeria, this can include things like utility bills (like prepaid power meters) or even rent payments. These late payments are reported to credit bureaus like CRC Credit Bureau Limited or CreditRegistry Nigeria, which can significantly damage your creditworthiness.

High debt levels

Consistently owing high amounts on personal loans, overdrafts, or other lines of credit can be a red flag for lenders in Nigeria. It shows a pattern of owing more money than you can comfortably repay each month. This can make you seem like a risky borrower, and lenders may be hesitant to offer you credit in the future, or they might charge you higher interest rates to compensate for the perceived risk.

Frequent loan applications

Applying for too many loans in a short period, like applying for payday loans from multiple lenders in a few months, can raise a red flag for Nigerian lenders. While each individual loan request might not mean much, a bunch of them in a short time frame can lower your score.

Debt collection by AMCON or banks

The Asset Management Corporation of Nigeria (AMCON) is a government agency that helps banks by buying bad loans from them. If your debts go unpaid and are handed over to AMCON for collection, it can really damage your credit score. These debts are reported on your credit report and make lenders see you as someone who struggles to manage debt responsibly.

Limited credit history

If you’re new to using credit or haven’t used it much, you might have a limited credit history. This can make it difficult for scoring models to assess your creditworthiness effectively, and you might end up with a lower score. This is especially common for young adults just starting out financially.

In Nigeria, where many people rely on microloans from smaller lenders rather than traditional banks, using fewer formal credit products can result in a limited credit history and make it more challenging for lenders to assess your ability to repay loans on time.

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Punishments and disadvantages of having a bad credit score

While a bad credit score doesn’t involve direct punishments like fines or jail time, it can still make your life difficult.

The exact consequences of a bad credit score can differ a little depending on where you live, but the main idea stays the same: a bad credit score can make it much harder to borrow money and can make things cost more in the long run.

Here’s a closer look at some of the challenges you might face:

Higher interest rates

This is a major downside. When your credit score is low, lenders see you as a riskier borrower. This means they charge you more interest to borrow money. You end up paying a significantly higher price for the same loan compared to someone with a good credit score.

Limited access to credit

With a bad credit score, getting new loans, credit cards, or lines of credit becomes much harder, or even impossible. This can make it difficult to fund important things you need, like a car, or to combine your debts into one lower-interest payment, or to start your own business.

Higher security deposits

Landlords may require larger security deposits from people with bad credit scores to protect themselves in case of missed rent payments. This can make finding a place to live more expensive upfront.

Difficulties with employment

In some industries, employers might check your credit history as part of a background check. A low score could hurt your chances of getting a job, especially for jobs that involve handling money.

The good news is that a bad credit score isn’t a life sentence. Here are some strategies to get you started:

Make consistent on-time payments

This is the single most important factor in improving your credit score. Pay all your bills on time, every time, including credit cards, loans, utilities, and rent payments. Even a single late payment can significantly damage your score, so set up reminders or automatic payments to ensure you never miss a due date.

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Pay down existing debt

Create a plan to get rid of the money you already owe. Focus on paying off debts with the highest interest rates first, like credit cards. You might also consider combining multiple debts into a single loan with a lower interest rate. This can make your debt repayments more manageable and free up extra money each month.

Build credit history with others’ help

If someone you know has a good credit history, like a family member or close friend, you can ask them to add you as an authorized user on their credit card account. Their on-time payments can gradually improve your credit score over time. But remember, this is a two-way street. Their spending habits will also impact your score, so make sure they are a responsible cardholder.

Check and fix credit report errors

Regularly review your credit report and dispute any mistakes you find.  Inaccurate information can lower your score.  You can get your credit report for free from credit bureaus like CRC Credit Bureau Limited or CreditRegistry Nigeria.

Explore alternative credit-building options

If you have limited credit history, consider using alternative financial products that report to credit bureaus.  For example, taking out a small loan from a well-established microfinance institution or online lender, and making all your repayments on time. Building a positive payment history with these products can help you establish your creditworthiness as a borrower.

Get help from a credit professional

If you’re struggling to manage your debt or improve your credit score on your own, consider seeking guidance from a credit counselor or financial advisor.  They can provide personalized advice and support to help you get back on track financially.

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The rewards of a good credit score are way better

A bad credit score may not restrict you with physical punishments, but it can create a financial pinch that definitely makes your life more difficult. But with a healthy credit score, you’ll qualify for better interest rates, have more access to loan products, and experience greater financial freedom.