How Can A Poor Credit History Affect Loans?

Combine a poor credit history with loans and you will find higher interest rates, larger monthly payments and even an inability to borrow. The following information explains what your credit history is and why good loans and poor credit history don’t mix.

Who Maintains Your Credit History?

Any borrowing you do, including all credit card activity, is reported by your lenders to the three main credit reporting bureaus, Esperian, Equifax and TransUnion. Your credit history, which is available for review to any lender with whom you apply for a loan, lists any negative actions in your borrowing history, including late payments, accounts closed for non-payment, charge offs, balances turned over to collection agencies, foreclosures and bankruptcies.

Negative items fall off after seven years, except for bankruptcies, which stay on your credit history for 10 years.

History and Score

Your credit history, including the above negatives and neutral information such as credit card accounts opened and closed and loans taken out, is used by the Fair Isaac Corporation to calculate a credit score for you between 300 and 800. This is called a FICO score, and loans in large part have interest rates based on it. When applying for loans your FICO score is used by lenders to determine the risk level of lending to you.

Interest Rates

You will have higher interest rates on loans with a poor credit history. If your history generates a FICO score of 620 or below, you are considered a subprime borrower and will receive an interest rate about 3 percentage points higher than a lender’s best customers. The median FICO score in the United States is 720; 760 is excellent.

Loan Availability

Beyond the FICO score, lenders will review the details of your report to see, for example, if you have a poor credit history because of regularly paying late. That can affect your ability to get loans at all.

Even if your personal financial circumstances have been set in order and you have a good debt-to-income ratio, a poor credit history can put loans out of reach for you because lenders fear you will not pay.

Loan Terms

In addition to the interest rate, a poor credit history can also affect the terms of loans that you are offered. One way to lower monthly payments on auto or personal loans is to extend the payout period. However, lenders view longer loans as riskier as their money is at risk of not being paid back for a greater period of time. With a poor credit history, such loans may only be available to your for shorter terms, a three-year auto loan, for example, making monthly payments steeper.

Repairing Credit

It takes time to repair a poor credit history, but it pays off as you will qualify for lower-interest loans with better terms. You are entitled to one free credit report each year from one of the three reporting bureaus. Check your report annually, make certain all information on your credit report is correct, maintain good financial habits and wait for negatives to fall off.

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