If you thought that a bad credit score only affected your ability to get qualified for personal loans and credit cards—think again.
Having a bad credit score is… bad. That’s why they call it “bad” credit. But what does that actually mean? If you’re a credit newbie, you would do well to learn all the different ways that bad credit can damage your financial wellbeing. Luckily, that’s exactly what we’re here to teach you. So check out these 10 ways that bad credit can totally mess up your life!
1. Higher interest rates.
The way that bad credit most directly affects a person’s life is in the realm of—well—credit. If you have a lousy credit score, you’ll have a hard time getting approved for personal loans and credit cards, especially if those loans are unsecured.
But even if you do get approved, the bad credit pain isn’t over.
“Everyone knows that having bad credit can make it difficult to be approved for a loan, but even if you do happen to be approved, it’s not always a good thing,” said Jacob Dayan, CEO and co-founder of Community Tax, LLC and Finance Pal, LLC.
“These loans will come with higher down payments, higher interest rates, and tighter terms. When it comes to loans, even a one or two percent increase in your rates can be extremely expensive over time.”
2. Car ownership.
Unlike unsecured personal loans, online loans, and credit cards, auto loans involve collateral. Specifically, they use the car or truck that the loan has been taken out to purchase. The presence of collateral means that these loans are easier to qualify for, even if you have bad credit.
Still, bad credit means that you will stand a much higher chance of being declined for the loan. And even if you are approved, you will once again face higher interest rates and more restrictive terms. Due to the larger principal amounts and longer terms for auto loans, this could mean paying thousands and thousands more in interest.
3. Buying a home.
“At worst a bad credit score will prevent you from securing a mortgage,” said CFP Patricia Russell, founder of the personal finance blog FinanceMarvel. “And at best, even if you do secure a mortgage, you will be paying a much higher interest rate compared to someone with a better credit rating.”
For first-time homebuyers, a credit score of 580 is needed to secure a Federal Housing Administration (FHA) mortgage loan with as little as 3.5% down. If your credit score is between 500 and 579, you’ll have to put 10% down in order to secure that same loan.
4. Car insurance.
Most people understand that their access to affordable loans and credit cards pretty much depends on their credit score. But here’s another less widely known way that bad credit can increase a person’s cost of living: Car insurance!
“A poor credit score will result in a higher premium as insurance companies run a credit check,” said Russell. And why is that? Russell went on to state that there is evidence linking lower credit ratings and higher claim rates.
Insurance companies actually use something called your “credit-based insurance score” to predict how many claims you’ll be likely to file. And according to a 2007 report from the Federal Trade Commission (FTC), these scores do a pretty great job:
“Credit-based insurance scores are effective predictors of risk under automobile policies. They are predictive of the number of claims consumers file and the total cost of those claims. The use of scores is therefore likely to make the price of insurance better match the risk of loss posed by the consumer. Thus, on average, higher-risk consumers will pay higher premiums and lower-risk consumers will pay lower premiums.”
While your credit-based insurance score isn’t exactly the same thing as your FICO score, the two are quite closely linked. If you have poor credit and you’re applying for car insurance, you should brace yourself for a larger bill!
It’s a fair bet that the biggest bill you encounter every month is the bill for your place of residence. If you own a home, that’s your mortgage payment. If you don’t, then it’s your rent. Either way, your credit score is going to come into play. When you’re applying for a new apartment, most landlords are going to check your credit score.
Like lenders, landlords don’t want to rent to people who cannot pay their bills on time. And since payment history makes up 35% of your total FICO score—more than any other single factor—poor credit will make many a potential landlord leery.
If you’re applying for a new apartment and you know you have lousy credit, there are steps you can take. The most helpful step of all is to offer a larger security deposit: Instead of one month’s rent, for instance, maybe you offer to pay them two months rent. You’ll still end up having to pay more due to your bad credit, but at least you’ll have a place to live.
6. Cell phone contracts.
If you’ve applied for a new phone contract recently, you might have noticed that they checked your credit before approving your application. That’s right: Bad credit can even affect how much you get charged to talk (and more likely, text) on the phone!
“One of the lesser known effects of bad credit is that it can make it very difficult to obtain a contract with a phone service provider,” explained Dayan.”This may not have been a problem in the past, but these days when your cell phone is your connection to the entire world, it can be a huge handicap.
“Similar to landlords, service providers like to know that you will be able to consistently pay for your service and cover any additional charges you may rack up. If you have bad credit then you will likely have to resort to more costly options like security deposits and prepaid plans.”
The answer here is similar to the answer for renting an apartment, as you’ll probably be forced to pay more for the phone up front. Beyond shopping around for the best deal, it might be a good idea to ask your friends and family members if one of them is willing to co-sign your phone contract.
7. Starting a business.
“Many entrepreneurs need a loan or line of credit to get their business idea off the ground, but as a small business owner, your personal credit will impact your ability to get a loan for the business,” said personal finance blogger Marc Andre of VitalDollar.com.
“Poor credit could prevent you from being able to qualify for the business loan, and you may have a hard time getting the funding that you need to start the business.” So if you’re looking to pay down some extra debt in hopes of boosting your score, an unincorporated side hustle might be the way to go.
8. Getting a job.
“It can be tough to secure employment, as many jobs in upper management will require a good credit score (especially in the financial sector). A bad credit history will greatly reduce your chances of securing a job,” said Russell.
Pre-employment credit checks count as a hard inquiry, which means that an employer will need your permission in order to run one. In certain states—and the District of Columbia—an employer’s ability to run credit checks on potential (and current!) employees is limited.
While a pre-employment credit check could prevent you from getting hired—or could lead to you being fired from a job you already have—these inquiries slightly more rare outside of the financial sector and jobs that require handling a lot of money. But don’t forget: Some bad information from your past doesn’t require a credit check. A quick Google search will do just fine.
“Not many people are aware that a poor credit score can result in higher costs of utilities like electricity, water, phone, and cable,” said Russell. “These are in essence short-term loans as you receive the benefits of the service before you pay for them.”
“Utility companies will always run a credit check when you sign up to and anyone with poor credit may be required to pay a deposit of several months worth of services,” she added.
And while many utility companies will refund that deposit after a year of on-time payments, some will require a letter of guarantee: Basically, someone with good credit has to co-sign your gas bill!
10. Strain on your relationship.
If you think that the effects of bad credit are limited to only matters of your pocketbook, think again. Bad credit and—and sometimes bad credit loans—can negatively affect your dating life. And the more serious the relationship, the more damage a bad credit score can do.
“The impacts of poor credit, like higher interest rates and missing out on job opportunities, can lead to a lot of stress and sometimes to financial difficulties,” said Andre. “These situations put added strain on marriages and other relationships. In this case, the indirect results of credit troubles can be much worse than the direct results.”
Maneuvering through life with a bad credit score is like trying to use your phone’s GPS right after you dropped it in the pool: Getting where you want to go is a lot more difficult than it should be, and the many detours you’re sure to encounter are going to be a real hassle.
Marc Andre is a personal finance blogger at VitalDollar.com (@vital_dollar), where he writes about saving money, managing money, and ways to make more money. His goal with Vital Dollar is to help individuals and families get the most out of the money they have and to reach their full financial potential. He lives in Pennsylvania with his wife and their two kids (a son and a daughter).
Jacob Dayan is the CEO and Co-Founder of Community Tax, LLC (@communitytaxllc) and Finance Pal, LLC. He began his career in Wall Street New York at Bear Stearns working in the Financial Analytics and Structured Transactions group. He continued to work in Wall Street until early 2009. When he then left New York and returned to Chicago to be with his family and pursue his lifelong dream of self-employment. There he co-founded Community Tax, LLC followed by Finance Pal in late 2018.
Patricia Russell is a Certified Financial Planner (CFP) and the founder of the personal finance blog, FinanceMarvel, which provides free financial advice on managing credit, debit and savings. Patricia has more than 10 years experience in helping families and individuals take control of their personal finances and achieve financial independence.
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The information contained herein is provided for free and is to be used for educational and informational purposes only. We are not a credit repair organization as defined under federal or state law and we do not provide "credit repair" services or advice or assistance regarding "rebuilding" or "improving" your credit. Articles provided in connection with this blog are general in nature, provided for informational purposes only and are not a substitute for individualized professional advice. We make no representation that we will improve or attempt to improve your credit record, history, or rating through the use of the resources provided through the OppLoans blog.