Why People With Bad Credit Pay Higher Interest Rates

July 29, 2018

Why People With Bad Credit Pay Higher Interest Rates

Do you have bad credit? Are you concerned about the impact on your finances? Are you worried that it will cost you money both now and over the long run?

According to Experian, bad or very poor credit is defined as a score between 300 and 579.

While you may feel alone with a credit score in this range, Experian also notes that approximately 16 percent of people are in the same position.

One of the primary downfalls of bad credit is higher interest rates.

Generally speaking, a low credit score corresponds with high interest rates. Conversely, a high credit score allows you to secure the lowest possible rate (thus saving you money).

Why Does This Happen?

From your point of view, you may not see yourself as a credit risk. Instead, you know you’re going to pay back the money as outlined in the terms and conditions of your loan or credit card.

Unfortunately, lenders don’t take this into consideration. Instead, they look primarily at your credit score and credit history when setting your interest rate.

Simply put, lenders charge a higher interest rate as a means of mitigating risk. They believe you’re more likely to default than consumers with good or excellent credit, so they charge a higher interest rate to lower their risk.

What You Can Do About It

The reason why people with bad credit pay higher interest rates is easy to understand.

However, it’s not always as simple to devise a strategy for digging out of your “bad credit hole” with the idea of saving money on interest.

Here are several steps you can follow to begin making progress today:

  • Review your credit report. It’s one thing to know you have bad credit, but another thing entirely to find out why.
  • Have you missed payments in the past?
  • Are there mistakes on your credit report?

Regardless of what you come across, there’s no better time than now to take action for the better.

Get serious about improving your credit score. You’ll never make progress unless you get serious about preventing the same mistakes that got you in trouble in the first place.

For example, if you’ve made late credit card payments in the past, setup a system for avoiding this in the future. Monthly alerts and regular account reviews can go a long way in keeping you on track.

Don’t shy away from using credit. Many people with bad credit assume that they should close all their accounts and stop borrowing money. While this may help prevent overspending and missed payments, it can actually drag down your score.

There are many things that make up your credit score, including:

  • payment history,
  • amounts owed,
  • length of credit history,
  • types of credit used,
  • and new credit.

Final Thoughts

Your bad credit may be holding you back right now, but this doesn’t have to remain a thorn in your side forever.

As your score increases, you can leave behind high interest rates in search of something more competitive. Upon doing so, you’ll come to find that you’re in position to save a lot of money.

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How to Avoid Paying Credit Card Late Fees  
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Only Apply for Credit Cards You Will Be Approved For  

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