7 Side Effects of Having a Bad Credit Score

Updated: January 02, 2024 Author:

Quick Answer: The main side effect of having a bad credit score is the inability to access affordable credit. New lines of credit attract higher interest rates and lower credit limits, which impacts overall credit utilisation. Having less credit being reported in the long term leaves customers with a thin credit history requiring them to build a credit profile with more expensive financial products. 

    1. Rejected applications for finance

    An instant impact of a bad credit score is rejection from mainstream lenders. A survey carried out by IPSOS on behalf of the Money and Pensions Service found that a poor credit history was the main reason for 19% of credit applications being rejected. The industry that should have the most favourable financial products will not entertain applications from applicants with subpar credit scores. 

    Most use automated processes for credit checking resulting in blanket refusals for anything other than a good or excellent credit score. Blemishes like court orders or missed payments and accounts in default are instantly rejected. The impact of that is…

    2. Forced to use subprime lenders charging higher interest rates

    There are a few types of lenders. Mainstream, near prime, and subprime. Mainstream lenders are the banks that cater exclusively to those with good credit scores. Near and subprime lenders cater to those with not-so-great credit scores. The only difference is the terms of the finance agreement and the interest rates charged. The more severe the bad credit entry, the higher the interest rate quoted for finance will be. That’s to say that you’ll get a better rate with a few missed payments on accounts that are now satisfied than you would with an account in default with a CCJ issued. 

    3. High credit utilisation

    When lenders know they are quoting you a higher interest payment, to lessen the time it takes to repay, they’ll reduce the maximum amount you can borrow. As an example, a credit card with a maximum credit limit of £3,000 with a 19.9% APR may be sufficient with someone with a reasonably good or fair credit score. Anything lower than what a lender deems average will increase the interest rate quoted. Instead of being offered £3,000 with a 19.9% APR, you could be offered a £1,500 credit limit with a 29.9% APR. If you have really bad credit, an offer may be just £500 with an APR of 59.9%

    When lenders conduct credit checks, they’ll consider your current credit utilisation. This is also part of how your credit score is determined. It’s a calculation of how much of a current balance you have against your total available credit. On your credit reports, your credit limits are shown per account. As an example, a mail order account may have a £1,500 credit limit, a credit card with a £3,000 limit, and another with a £5,000 credit limit. Overall, that’s £9,500 credit available. Even if you maxed out the £5,000 credit limit on one card, you’d still have high credit utilisation (over 43%) lowering your credit score. 

    If you’re near prime, you’ll have higher interest, meaning it’ll take you longer to repay the debt, and it’ll cost you more in the long term. Until your current balances are brought down to below 25%, you’ll likely find it hard to borrow from your bank or any other mainstream lender. 

    4. Thin credit history 

    After an adverse entry is recorded on your credit files, it takes six years or more for information to come off your credit reports. During that time, you’ll hit barriers trying to access credit. You need specialist lenders in the subprime market that cater to the types of financial discrepancies you have. If you tap out of the finance market completely for the six years that are entries are on record, after they drop, your circumstances will change from having bad credit to having no credit, or at least a thin credit history, meaning there’s insufficient information for lenders to conduct a satisfactory financial risk assessment. 

    5. Difficulties getting approved for basic utilities

    Even applying for a broadband deal involves a credit check being done. Utility bills can affect your credit score, particularly if you have a history of paying late or not at all. If you don’t meet the minimum threshold for the company you’re applying to, you can be rejected for a credit account. That just means you can’t pay your bill monthly. Instead, if you wanted the deal, you’d have to pay the contract in full upfront as a lump sum. 

    Most utility providers will only agree to a 12-month contract because the prices usually increase annually anyway. A broadband deal for £22 a month on a 12-month contract would require a £264 down payment to cover the year. Keep in mind, that’s only for the service. Also, any rewards such as £40 supermarket vouchers as money back, are usually reserved for those who pass the credit check and pay by direct debit. 

    6. Renting a property

    Most people know that with bad credit, getting a mortgage will be hard. What’s not so widely known (until you experience it) is that getting a landlord to accept a tenant with bad credit is just as cumbersome. Some will accept tenants with bad credit, either with a co-signer on the tenancy agreement creating a joint liability on the tenancy, or insisting on a higher deposit. 

    Tenants have been known to turn to rent guarantor services. These companies run credit checks, assess your risk, and sell what’s essentially, a guarantor certificate, providing landlords the assurance that if a tenant fails to pay their rent, they, as the guarantor, will pay – up to 12 months is usually the guarantee period. Paying a 12-month deposit on today’s average rental fees would be impossible and silly given that prices are averaging £800 monthly for rent. Deposits would be in the 5-figure sums. Instead, landlords may be happy with a deposit equivalent to 3 months or longer. More common is to get a co-signer for a tenancy agreement with bad credit. 

    7. Employment problems 

    Any job that involves cash handling may include a credit check as part of the vetting process. Bad credit can stop you from getting a job or a promotion if a credit check is required as part of the vetting process. Employment credit checks are commonplace in the finance industry (including FinTech), as well as the Armed Forces, and Police force. Some do it to ensure they’re hiring someone financially responsible, others, such as the Army and the Police are more interested in eliminating the risk of corruption, such as if you have a high level of debt.