In the world of personal finance and lending, one of the most important statistics to keep track of is your credit score. Simply put, your credit score drives many lending and financing decisions. If you have a low credit score, a lender either might not lend you money or they’ll lend you money at a higher interest rate.
On the contrary, borrowing money will be easier and less expensive if you have a high credit score. But how bad can your credit score get? Can you have a negative credit score? Keep reading to learn the answers to these questions and more.
What is the lowest possible credit score?
A credit score is a number that ranges from 300 to 850, you can have no credit history but your score cannot go lower than 300. In the world of credit scores, the higher the score, the better off you are.
It’s also important to keep in mind that a credit score is fluid, meaning credit scores can improve or decline depending on various circumstances and factors. While a high credit score is good, a low credit score comes with numerous consequences.
The two main side effects of a low credit score are as follows:
- Lenders will be reluctant to lend you money. Your credit score is essentially your financial reputation, highlighting how likely you are to pay back what you borrow. If you have a low credit score, your lenders will consider you to be at a higher risk of defaulting on loans. This can cause a lender to either not approve you for what you’re looking to borrow or they’ll charge you more interest for borrowing their money.
- Borrowing money will be expensive. As mentioned above, if a lender deems you to be at a high risk of defaulting on your loan, the lender reserves the right to charge a higher interest rate on any money that you borrow. This will ultimately cost you, the borrower, more money.
Can you have a negative credit history?
Negative credit history is all too common. To be fair, people experience tough financial times, and during those times, credit scores are often negatively impacted. Bad credit reports, as well as credit reports that show information that subsequently lowers your credit score.
Negative items on your credit report typically include the following:
- Any defaults on a loan: This would include any home foreclosures or car repossessions due to lack of payment. Before a home enters foreclosure or a car is repossessed, the loan needs to be delinquent for a long period of time. You won’t lose your home or your car if you are past due by a week, but if you haven’t paid your bills for three or four months, you could be at risk of foreclosure or repossession.
- Bills that you simply forgot to pay: You may have thought you canceled certain subscription services, but in reality, you forgot to complete the final step. As a result, the service remained active, meaning you fell behind on payments without realizing it. Now, you are past due on your bill, despite not expecting a bill in the first place as you thought the service was canceled. This will eventually be sent to a debt collector, and your credit score or credit history will be negatively impacted.
Late or missed payments
It can be easy to forget to pay a bill that is not set up with auto-pay. If a bill is past due for too long, the bill will likely be sent to a collection agency or reported against you, subsequently affecting your credit score. This will negatively influence your credit score, even if you simply forgot to pay the bill.
High debt levels
High levels of debt can also negatively affect your credit score. Credit agencies will treat debt and income as a ratio instead of an absolute figure. For example, if an individual makes $100,000 per year but the person has $50,000 worth of yearly debt payments, their debt-to-income ratio is 50%.
On the other hand, if an individual makes $300,000 per year and they have yearly debt payments of $100,000, then their debt-to-income ratio is 33%. While the debt amount in the second example is greater, the debt-to-income ratio is lower, which is favorable and less risky.
Minimal credit history
Your credit score is your financial reputation. Having minimal credit history can have a negative impact on your credit report as there aren’t many data points to use to determine your creditworthiness.
Establishing credit as early as possible is a smart move. Therefore, when you go to apply for a loan or a service that requires a credit pull, they have a longer credit history. The greater the time period, the better.
Having collections or bankruptcies
If you have items in collections or have filed for bankruptcy, your credit score will be negatively impacted. Although collections or bankruptcies may seem extreme, they are very common.
There are plenty of people who have a past due bill that is in collections. Sometimes, people simply forget about bills or services they are supposed to pay for, which causes the bill to be sent to collections. That’s why attaching auto pay to as many bills as you can is a wise idea.
What having a negative credit report means
Having negative items on your credit report will result in a lower credit score. A lower credit score could yield the following side effects.
You may be denied a loan
You might be denied a loan if you have a negative credit score. If a lender isn’t comfortable lending you money or if a landlord does not want to rent to you due to your credit history, they reserve the right to refuse to lend you money or a living space.
A negative credit score will not only impact your housing opportunities, but it can impact personal loans, car loans, student loans, loans you’re looking to obtain from a retail store and credit cards. The lower your score, the less reliable lenders will think you are.
You may need to make a higher down payment
One way to combat a negative credit score is to offer a larger down payment on whatever it is that you are looking to buy. Not only does the larger down payment ultimately reduce how much money you will need to borrow, but it also shows the lender you are committed to the property, making you may be less likely to default on the loan.
You may receive higher interest rates or fees
If a lender deems someone as being high risk, the lender will look for a way to yield a greater return. Consider the following examples.
Let’s say an individual is looking to borrow $30,000 so that they can purchase a car. The individual has a credit score of 500. This is a low credit score, so the bank deems this score, as well as this person, to be risky. The bank might still lend money to this individual, but the bank will likely charge a 10% interest rate for doing so.
Now let’s say an individual is looking to borrow $30,000 to purchase a car, but the individual has a credit score of 800. This credit score is fantastic. And the individual is viewed as being low risk, so the bank is comfortable charging a 5% interest rate on the borrowed funds instead.
How to check whether you have a negative credit history
The best way to manage your credit score is to do so actively. Make sure you always know what your credit score is. In addition to paying your bills on time and maintaining a healthy debt-to-income ratio, the smartest thing you can do is obtain a free credit report once per year by visiting annualcreditreport.com.
This credit report will show you all of the details that might be negatively impacting your credit score. If something seems off, you have the right to dispute it. If successful, disputing a claim can raise your credit score. Bad credit reports are sometimes a result of bad data or a mistake, so make sure you review your credit report at least once every year.
How to improve negative credit history
Your credit score is fluid, meaning it will likely rise and fall throughout different periods in your life. Keeping your score in the same position at all times takes a lot of work, but improving your credit score is 100% possible.
Stay up to date on payments
First and foremost, staying up to date on your bills and recurring payments is a must. The easiest way to do this is to enroll in automatic payments with all of your bills.
You can typically enroll in autopay via debit card, credit card or ACH. Opting to sync your automatic payments via ACH is a fantastic option because your bank account will rarely change whereas a credit card and a debit card can either expire or get lost. Remembering to update your card information whenever you get a new card can also be a hassle as well.
Pay off your balance in full every month
Paying off what you borrow in full on a monthly basis is another great way to improve your credit score. For example, if you rack up $800 in credit card expenses in one month, paying off the entire balance at once is far better than only paying the minimum amount.
Regularly check your credit report
Regularly checking your credit report will allow you to quickly identify anything that may be inaccurate. You can also find details that could be negatively impacting your overall credit score. Focusing on correcting these negative marks is a solid way to improve your credit score.
Don’t apply for too many new accounts
Applying for new credit accounts can also hurt your credit score. Every time you apply for a new credit account, your credit score is checked by the potential lender. A hard credit pull can negatively impact your credit, even if the hard credit pull is explainable.
Additionally, a bank may become concerned if you apply for five different credit cards. The lender may question if you plan to max out each credit card in the coming months or if there is a reason you have taken out so many credit cards in such a short period of time.
Maintain a healthy debt-to-income level
Maintaining a healthy debt-to-income level is another way to improve your credit score. A good rule of thumb is the 28/36 rule. Simply put, your front-end debt ratio is what percentage of your income goes to housing. The back-end ratio, or 36%, is for all other debt obligations, such as student loans, credit card payments and personal loans.
Your credit score is your financial word
Your credit score is your financial word. It shows a lender how reputable you are and how likely it is that you will pay back the money you borrow. A lender uses this information to determine if they are comfortable lending you money.
It also helps them determine how much they should charge you for borrowing their money. The best way to improve your credit score is to never go back on your word. If you borrow money, pay it back in full and on time. Do not fall behind on your bills or recurring expenses, and maintain a healthy debt-to-income balance.
Is having a low credit score good?
Absolutely not. In the world of credit, the higher your score, the better.
Does having no debt hurt your credit score?
Having no debt doesn’t hurt your credit score. You can still have financial obligations you must meet every month, even if you do not have financial debt.
Why don’t I have a credit score?
You might not have a credit score if you have never asked to borrow money or if you never entered into an agreement with a company for a monthly or yearly service. If you do not have a history of paying bills in your name, there’s no way for a credit agency to give you a credit score because you don’t have a credit reputation yet.