Here’s How Credit Score Affects Bond Costs

Anyone’s financial life must include having good credit because it paves the way for obtaining access to reasonable funding for various purposes. Creditors and lenders view good credit as a sign that a borrower poses a low risk. 

When applying for a new loan or credit card, one of the first things taken into account is a person’s credit score, which is a three-digit figure used to assess how strong their financial past and present are. Many people are unaware that a credit score is utilized for various additional purposes, including determining bonding costs. 

Understanding surety bond costs and how they work is essential whether you need one for your motor vehicle dealership, mortgage brokerage, or construction company.

Understanding surety bond cost and how credit scores affect it is essential whether you need a surety bond for your construction company, liquor store, dealership, or any other type of business. When determining the price of a surety bond and how your credit score affects that pricing, you need to know the following:

Why Is a Credit Check Necessary for Surety Bonds? 

Surety firms and bond suppliers offer surety bonds to a wide range of professionals across numerous industries. In some instances, the licensing procedure includes the requirement for a surety bond; therefore, a company cannot be legally conducted without one. 

Due to the protection it offers to the bondholder’s clients and the state or city issuing the bond, a bond is frequently required. A claim may be made against the bond in case of a mishap, such as an incomplete project, to assist pay for any resulting financial losses or other damages. 

Due to the surety bond’s structure, a credit check is necessary as part of the application procedure. When a company or professional purchases a bond from a surety company, they are given a type of credit. This is so that, after being first paid by the bonding business, any claim against a bond must be returned by the bondholder. 

Surety agencies examine credit reports to determine the level of risk an individual represents in order to make sure the bondholder can and will pay bond claims that arise in the future. While obtaining a surety bond while having poor credit is still possible, it is advantageous to be financially stable before applying.

What Qualifies as Poor Credit? 

When you have poor credit, your credit score is affected by unfavorable items on your credit report. Low credit scores range from 300 to 650. A credit score below 600 is considered bad credit, while some lenders may also view a score between 600 and 650 as bad credit. 

Creditors view people with low credit scores as significantly higher risks than those over 600. Bad credit can occur for various reasons, from missing payments to serious financial difficulties like bankruptcy or foreclosure. Whatever the cause of your poor credit helps to be aware of the requirements.

Contrasting Good and Bad Credit. 

Most creditors view scores between 700 and 749 as decent, while those above 750 are regarded as exceptional. These credit score ranges need some effort on your part regarding your financial activity. A credit score in the good range can be maintained by managing credit card debt well, paying bills on time, and avoiding significant negative marks. Bad credit results when these behaviors aren’t prioritized.

How is the Price of a Surety Bond Determined Based on Credit Score?

Your surety bond cost is determined partly by your credit score, which is based on the previously mentioned variables. A surety agency will price your surety bond depending on the level of risk you represent using your credit score issued by one of the three credit agencies. Bond providers calculate the bonding cost as a percentage of the total bond amount required; this proportion commonly ranges from 1 to 15%. 

Therefore, if you need a $25,000 surety bond and you are deemed to be low risk by the surety agency, your bond price might be as little as $250. (1 percent x 25,000). However, not everyone qualifies for the lowest bonding rates because of their credit histories.

How Does the Price of Bonds Affect Credit Score?

The lowest risk bondholders will incur the smallest percentage expense for their surety bond. People with poor credit pay considerably more since the bonding firm views them as a higher risk. Think about the $25,000 bond example from before. 

The percentage of bonding costs may be 10% for someone with bad credit. In that case, a bond would cost $2,500 rather than $250. As you can see, a low credit score significantly affects the price of a surety bond. 

Can Someone with Bad Credit Obtain a Surety Bond? 

The good news is that you can still obtain a surety bond even with bad credit. It is feasible to obtain a bond with poor credit, but you will probably have to pay a higher percentage of the total bond amount than someone with strong or excellent credit. 

Due to the nature of what the bonds guarantee, it is more difficult to secure construction bonds if you have credit problems. 

Your assurance company should work with you to identify the finest bond options at the most competitive rates, considering your unique credit situation. In order to improve your surety bond application, you could also be required to give other information, such as: 

• Financial information for a business that is organized, like a balance sheet, income statement, or cash flow statement 
• Knowledge of your particular industry 
• Cash on hand, such as in checking or savings accounts, investments, or business
• Claims history for earlier surety bonds

Your Legal Options If Your Interest Rate Rises. 

If your lender raises your interest rate, it will affect the entire balance, not only new purchases (apart from anything still subject to special promotional rates). This could indicate that it’s harder for you to make your payments on time. 

When deciding whether to change the interest rate, your lender will consider several factors. This can involve details from your credit report or your account management. 

Whether you ask, your lender must provide a good explanation if the increase in interest you’re paying is risk-related. 

What Issuers of Credit Cards Must Do.

In order to raise your interest rate, your credit card company must: 

• At least 60 days should pass since the day you were initially informed of the proposed increase (during this time, you might give notice to your credit card provider to close your account) 
• Enables you to settle the debt owing at the previous interest rate over a reasonable period of time (before you were notified of the proposed increase in interest rate). 
• If you decide to end the account, you might want to think about getting a new credit card, perhaps one that lets you transfer balances interest-free for a while. However, you might not be eligible for these bargains if your credit score is low. 

It’s crucial to look into any expenses related to a balance transfer. 

The card provider may withdraw the offer and raise your rate to the usual rate if you’re on a 0 percent deal and forget to make a payment on time. If this occurs, it could be worthwhile to get in touch with them and let them know why the payment was missed. The business may relax its criteria if you have a history of effectively managing your account. 

An excellent method to ensure you never miss a payment again is to set up a direct debit. Making manual payments could be preferable if your income fluctuates and you’re concerned there won’t be enough money to pay the Direct Debit.

Think About Contacting A Credit Counselor For Advice.

I hope these suggestions were beneficial. By looking into our advice on raising your score, you have already taken the first step toward better credit.