There are so many unexpected things that can happen in your life and that can lead to having bad credit. Sometimes, you had to deal with unexpected medical bills. In other cases, you just made bad financial choices when you were young. No matter the case, when you have bad credit and you need access to money fast, your options are limited, with only a handful of choices being viable, like LetMeBank.
Unfortunately, most people do not know anything about credit scores and how bad credit can actually affect their lives. This is why you should be aware of the following.
Credit Rating And Credit Score
Most people believe that credit rating and credit score are exactly the same things. This is incorrect, even if there are similarities in place. Credit rating is actually meant for businesses, which are graded on a scale ranging from AAA to D (this being the low-end rating). This is a system that determines how likely it is for a business to quickly repay debts.
Credit reports and scores help the lenders to decide if a borrower is likely to pay back a loan and are meant to be used for individuals. Usually, the standard rating system used is the FICO (Fair Isaac Corporation) one, which ranges between 300 and 850.
How Will Bad Credit Score Affect You?
When your credit history is poor or you have a low credit score, your finances are seriously impacted. The first obvious thing to be aware of is that you will be denied the possibility of using a credit line. When the credit score is low, lenders know that you are a high-risk borrower. They also know that they should not be willing to lend money.
When the credit score is low and credit is denied, it is going to be expensive to borrow money. Usually, extra fees are in order and the interest rate is much higher. Your monthly payments will be increased.
Such loans are known as being “subprime loans”. Although they do have high-interest rates, they are often used by people to pay off their credit cards and consolidate debt.
Bad Credit And Mortgages
When applying for mortgages, you do not need stellar credit since this is not a complete deal-breaker. However, this does not mean that the process will not be affected. All mortgage lenders analyze your credit score and if they are willing to give you a loan, they do ask for higher interest rates or a higher down payment.
Different Loan Options Have Different Credit Score Requirements
For a standard FHA loan, the minimum credit score required is 580. Mortgages are possible with lower credit scores but they are always listed as being subprime. Due to this, interest rates are higher and many other unfavorable terms appear, like the already mentioned high down payment needed.
For the standard loan, the minimum credit score is 620. With such a score, mortgage insurance is dropped after reaching 20 percent equity and making a down payment of 3.5%. When the down payment is higher, at around 10%, mortgage insurance can drop after eleven years. Refinancing is always possible for better rates.
For VA loans, there is no official minimum credit score requirement. Different lenders also have different policies in place. However, you can expect a minimum of 620 to qualify.
To sum up, having bad credit always leads to problems in gaining access to loans in the future. This is really important because you have to be ready for everything in the long run. When you do not know your credit score, take all the necessary steps to learn it.