A poor credit rating can have a negative impact on your life. Lenders don’t like consumers with subprime scores. If you have less than a perfect rating, you may have a hard time qualifying for loans or getting a credit card.
Most lenders rely on the credit history of a borrower to determine their trustworthiness. They check credit reports to get a comprehensive look at a potential client’s history. These reports contain information that can include past loan payments, bankruptcies, credit usage, foreclosures, and much more.
Costs of Bad Credit
In the US, there are three major reporting bureaus : Equifax, TransUnion, and Experian. Each bureau has a different way of computing credit scores. Having bad credit will not just affect your finances, but also your personal and social life. Here are some ways poor credit impacts you in the long run:
Car Insurance Premiums
There are several factors that car insurance companies consider when determining premiums. Aside from your driving record, they also look at your credit report. If you have a bad score, your premium may be higher as a result. Some insurance providers do random credit checks for their clients every three to five years and adjust premiums depending on their score.
Qualifying for Auto or Home Loans
Having bad credit will also give you a hard time qualifying for just right loans or credit cards. Lenders avoid borrowers with bad records. Most traditional creditors don’t give out loans to subprime consumers or to individuals who have a score below a specific level. While having a rating of 698 might not seem to be that far from 702, falling below 700 is a big deal to most lenders.
If you manage to get a loan with a low score, your interest rate will likely be higher than usual. For instance, prime borrowers might enjoy an average APR of 3.75 percent, whereas a subprime consumer may have an interest rate of 5.35 percent. The difference in the rates might not seem like much, but the subprime borrower will pay a lot more over the life of the loan than the person with the lower interest rate. This principle applies to home loans, mortgages, credit cards, personal loans, and auto loans.
Higher Phone, Internet, and Cable Bills
Some people can’t live without their smartphones. Having a mobile phone contract today is more important than having a landline. A low credit score can disqualify you from getting a mobile phone contract, as phone carriers often check the potential customers’ credit scores to determine approval. You might also experience this scenario when applying for service with a cable and internet provider.
If your credit is not that good, your phone, internet and cable bills will likely have additional fees as well. The Federal Trade Commission (FTC) allows service providers to charge higher rates to bad credit consumers. This is legal if the provider tells you about their risk-based pricing scheme. Check your bill to find out if you are paying additional charges monthly.
Expensive Credit Cards
You can still get a credit card with a bad rating, but don’t expect it to have low fees, a competitive interest rate, or a rewards program. You might, however, qualify for accounts with high fees, low limits, and high interest rates. Aside from the annual fee, you may also need to pay a processing fee or even a monthly service fee. Initial limits are usually around $300.
If you only make the minimum payment each month on a credit card with a high interest rate, keep in mind that it will take you longer to bring down the balance. It is advisable to pay the balance in full each month. That way, you are not paying interest, and at the same time, you are improving your rating.
Besides the direct costs involving insurance and interest rates, bad credit can also affect you indirectly in many ways. For instance, some employers do check credit reports of potential employees. The company might prefer one with a better score than you, especially if the position involves handling other people’s assets or finances.
Financing your education can also be difficult with bad credit. That means you might miss out on getting more training, which may help improve your chances of getting a higher paying job.
Purchasing a house, one of the biggest investments for most Americans, is another opportunity that might be affected by a poor credit score. Not qualifying for a home loan means you are spending your money on rent each month instead of building equity in a home.
You may also miss out on investment opportunities because you can’t get a working capital, and since you are likely to pay higher fees, you may lose out on extra money to save up for things like retirement.
Enlisted personnel and federal employees need to maintain good credit to earn government clearance. A bad score can disqualify you from career advancement opportunities when working for the government or in the military.
Renting an Apartment
It is difficult to apply for an apartment lease with poor credit if the landlord runs a credit check. In the eyes of the landlord, potential renters with bad scores are less likely to pay their rent on time. To determine eligibility, they may look at delinquencies, bankruptcies, foreclosures, and late payment patterns in the report.
Rental properties in prime locations often have strict standards because owners can afford to pick and choose their renters. Some landlords don’t rent out their apartments to people with scores less than 640.
Luckily, there are several ways you still can get the apartment you want with a bad credit score. Provide an explanation of the negative items in your report or ask for a recommendation from previous landlords. Just make sure you are current on your payments. Lastly, offer an incentive, such as a shorter lease, direct deposit from your bank, or a larger deposit.
On another note, utility companies sometimes ask for security deposits as well. Always ask them what happens to the deposit when you move out. Often times, they give it back when your lease is up.
A bad rating can damage your personal relationships. While profiles don’t merge after marriage, your credit can still affect your spouse’s ability to qualify for a new home or auto loan when you are applying for one together. A partner’s bad credit can cause the household to be seen as a risk in the eyes of a lender.
Improve Your Bad Credit
As you can see, poor credit can cost you a lot of money. You need to proactively improve your score to get out of that situation. The first thing you should do is understand how the scoring system works. Then look for areas where you can improve and try to fix any issues you can find. As your credit improves, you’ll also enjoy a better lifestyle