Bad credit
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Bad credit is a term used to describe a person's low credit score or a lack of credit history. It is typically caused by missed payments, a large amount of debt, or other financial missteps. Bad credit can have a significant negative impact on a person's ability to secure loans, receive lower interest rates, or get approved for credit cards.
Consequences of bad credit
Some of the consequences of having bad credit include:
- Difficulty obtaining loans: A person with bad credit may be denied for loan applications, or be offered much higher interest rates than those with good credit.
- Difficulty getting approved for credit cards: A person with bad credit may not be approved for a credit card, or may be offered a card with a low credit limit.
- Difficulty finding rental housing: Landlords may use credit as a way to evaluate potential tenants, and those with bad credit may be denied for rental housing.
- Difficulty getting approved for utilities: Utility companies may also check credit before approving a person for service.
Overall, bad credit can make it difficult to obtain loans, rent housing, and get approved for utilities. It is important for people to make sure they are making payments on time and keeping their debt levels low in order to maintain a good credit score.
Example of Bad credit
Bad credit can be an example of someone’s credit score falling below a certain threshold, usually around 600-650. This could be due to missed payments, high levels of debt to income ratio, or excessive amount of debt. Having bad credit can have a significant effect on a person's ability to obtain loans, receive lower interest rates, and get approved for credit cards.
Having bad credit can lead to a number of undesirable outcomes, including difficulty obtaining loans, renting housing, and getting approved for utilities. It is important for people to make sure they are making payments on time and keeping their debt levels low in order to maintain a good credit score.
Types of Bad credit
Bad credit can be divided into two main categories:
- Payment History: This is the most important factor in determining a person's credit score. It is based on a person's record of payments on any existing accounts, such as credit cards, loans, and other such lines of credit. Late payments or missed payments can have a significant negative impact on a person's credit score.
- Credit Utilization: This is the ratio of a person's total credit limit to their total debt. A high credit utilization ratio can have a negative impact on a person's credit score.
Apart from the consequences of having bad credit, there are some other approaches that can be taken to address the issue.
- Paying off debt: Paying off existing debt can help to improve a person's credit score.
- Dispute inaccurate information: If a person finds inaccurate information on their credit report, they can dispute it with the credit reporting agencies.
- Reduce credit utilization: Reducing the amount of credit used relative to the total available credit can improve a credit score.
- Get a secured credit card: Obtaining a secured credit card can help to build a credit history, as long as the payments are made on time.
These approaches can help to improve a person's credit score and improve their financial situation. It is important to take the time to understand credit and make sure payments are made on time in order to maintain a good credit score.
Suggested literature
- Jorion, P., & Zhang, G. (2007). Good and bad credit contagion: Evidence from credit default swaps. Journal of Financial Economics, 84(3), 860-883.
- Dobbie, W., Goldsmith‐Pinkham, P., Mahoney, N., & Song, J. (2020). Bad credit, no problem? Credit and labor market consequences of bad credit reports. The Journal of Finance, 75(5), 2377-2419.
- McClanahan, A. (2014). Bad credit: the character of credit scoring. Representations, 126(1), 31-57.
