The average credit score was 704 in the year 2018, an all-time high. Most lenders consider that a fair or even good score, but since it’s an average of everyone, it means many Americans have scores below 700—sometimes far below that.
Personal credit is one of the most crucial elements of securing a surety bond and setting the price for a bond. For some bonds, such as Mortgage Lender Bonds and Mortgage Broker Bonds, credit score is the primary factor in determining approval and bond rate. Here is some information on credit scores, and how they affect one’s application for a surety bond.
What Is Good Credit and What Is Bad?
Credit scores are graded between 300 at the low end and 850 at the high end. Anything above 750 is considered excellent credit, while lenders will consider scores below 650 to be unfavorable. These are the quantitative ways lenders measure bad credit, but they rely on qualitative means as well. For example, they may investigate a person’s credit report for bankruptcies, foreclosures, or other signs of financial irresponsibility. Credit scores primarily define good vs. bad credit, but some lenders, including some bond companies, will look deeper into an individual’s financial history during the underwriting (risk assessment) process.
How Do Surety Companies Assess Risk?
Surety companies calculate the risk of the principal (the person obtaining the bond) before issuing a bond and charge the rate for the bond accordingly. A client with worse credit is often seen as higher risk to the surety—thus, they have to pay a higher premium to make up for that higher risk. The reason for this is that the surety has a higher probability of experiencing a loss on the bond from a client with worse credit. Since the client has demonstrated an inability to pay back his or her debts in the past, clients with bad credit are thought to be at risk of repeating those mistakes. To protect themselves from potential losses, sureties charge clients with lower credit higher premiums.
While standard surety bond premiums range between 1% and 5%, a client seeking a surety bond with bad credit may be required to pay between 5% to 15% or more to secure their bond. In some cases, a client’s bond application may be denied due to their credit.
What If a Client Has Bad Credit?
In some cases, bad credit will simply mean that the client will pay a higher rate. In other instances, one may be required to post collateral to secure the bond. When people ask how bad credit can affect a client’s surety bond, the answer depends on the surety bond company deciding the terms.
Why Do Surety Bonds Do a Credit Check?
Surety bonds guarantee to pay the obligee (the bond beneficiary) if the principal (the bondholder) fails to pay their debts. Since the surety accepts significant financial responsibility on behalf of the principal, the company wants to know who it’s partnering with. Credit checks are not a perfect indicator of someone’s financial responsibility, but they’re one of the few reliable tools available. That’s why surety companies, like all lenders, perform a credit check during the application process.
How Is a Surety Bond Cost Calculated Based on Credit Score?
When someone applies for a bond, underwriters pull out details regarding the applicant’s credit and plug them into a formula to calculate a premium amount. Some lenders are willing to accept more risk than others, and all surety companies assign different costs to different credit scores. People with bad credit will always pay more, but how much more can vary by surety bond company.
Can You Get a Surety Bond With Bad Credit?
The short answer is yes, as long as you work with the right bond company. Some will deny you outright and others will ask for additional collateral, but a few companies are eager to help anyone with bad credit. Viking Bond Service is one of those companies. We don’t think bad credit should be an obstacle, especially since many people with credit mistakes in their past commit to being excellent borrowers the rest of their lives. Bad credit doesn’t have to hold you back—from a mortgage, professional license, big contract or anything else requiring a surety bond—as long as you partner with the right surety from the start.
Contact Us to Find Out More
Having bad credit impact one’s ability to secure a bond and can be challenging, especially as bonds are required in order to work in certain industries and professions. At Viking Bond Service, we recognize that not everyone has great credit, and that over the course of your life, there may be extenuating circumstances that will reduce your credit. Viking Bond Service has access to several programs specifically for clients seeking surety bonds with bad credit.
To find out more about securing a surety bond with bad credit, get in touch with us today. You can give us a call at 1-888-278-7389, or complete our contact form to connect with one of our knowledgeable and friendly surety bond professionals. Consult a free resource we created, All About Surety Bonds, to learn more about the entire bonding process.