6 Scary Facts about Bad Credit Scores

If you need some motivation to start fixing a lousy credit score, then these six terrifying facts should help scare you into action.

When you need to feed your family but there’s not enough money in the bank account to cover it, it may not seem like you have much of a choice but to run up credit cards or skip other bill payments, like on your utilities or maybe your car loan.

In the long term, however, actions like these can damage your credit score, which means the next time you need a line of credit, you may have to pay higher interest rates. And if your score gets really low, you may only be eligible for bad credit loans or predatory payday loans and cash advances that can threaten your already fragile finances.

Bad credit is a huge problem in this country, where only 40 percent of us have at least $1,000 in the bank to cover emergency expenses. Let’s take a look at six other scary facts about bad credit scores.

1. 34.8 percent of Americans with credit have bad credit.

According to a recent report by one of the top three credit bureaus in the country, nearly 35 percent of Americans with credit have what’s called “subprime credit,” or a FICO credit score between 580 and 669. In fact, the national credit score average is 701. (A “very good” score is between 740 and 799.)

Since your credit score is the primary tool lenders use to measure how risky it would be to loan you money, having subprime credit means you may end up paying much higher rates in order to borrow money. In some cases, you may not qualify for the product you want at all.

2. 26 million Americans don’t have any credit at all.

A recent Consumer Financial Protection Bureau (CFPB) report found that about one in 10 Americans don’t have any credit history with a national credit bureau—or at least not enough credit history to produce a credit score. This is what is called being “credit invisible.”

Certain communities are at a higher risk for being credit invisible, including black and Hispanic consumers (15 percent credit invisible), as well as those who live in low-income areas (30 percent credit invisible).

It can be very difficult for those with no credit to qualify for financial products like credit cards and installment loans. They may also have trouble getting a cell phone contract or an apartment.

3. About 12 million Americans use no credit check loans each year.

According to a study by the Pew Charitable Trusts, about 12 million Americans took out at least one payday loan—a predatory form of a no credit check loan—in 2010. An average borrower actually took out eight payday loans, each with an average principal of $375.

Due to payday loans having such short terms and high interest, many borrowers have to take out multiple loans simply to pay down the debt owed on the first loan. Because these storefront and online loans do not require credit checks—hence the umbrella term “no credit check loan”—vulnerable populations with poor credit or credit invisibility are frequently the target of predatory lenders.

4. The national average interest rate on a payday loan is 400 percent.

Recent reports have shown that payday loans in the United States come with an average annual percentage rate (APR) of 400 percent and can be as high as 700 percent!

APRs reflect that total cost (interest and fees) of a loan per year, so it is a good way to compare the cost of different financial productions.  Compare those payday loan APRs to your average credit card or personal loan and you will see rates that are twenty times higher on the low end.

And if you think a secured title loan might be a better option—think again. The average annual interest rate for those no credit check loans is 300 percent. Plus, according to a study from the CFPB, one in five title loan sequences ends with the borrower’s vehicle being repossessed.

5. A bad credit score can prevent you from getting a job.

That’s right. It’s not just loan and apartment applications that can be affected by bad credit. Unless you live in one of the few states that have regulated the practice, employers can—and do—run your credit as part of the application process.

According to one report, which surveyed low- and middle-income households, one in four participants said that potential employers asked to run their credit, and one in 10 respondents had been informed that they would not be hired based on credit report findings. Of those, 70 percent were rejected on the basis of their credit score.

A survey of human resources professionals—the people who help make hiring decisions for companies—found that 25 percent of participants checked credit for some positions while 6 percent checked for all positions.

6. Bad credit may be the result of errors.

The three major credit bureaus—the companies that calculate your credit score—are not perfect and sometimes they even make mistakes that can negatively impact your credit score.

In fact, a new study of CFPB consumer complaint data showed that 43 percent of all complaints made in 2018 were related to credit reporting, and 61 percent of those complaints were specifically about credit reporting mistakes.

Credit reporting mistakes can be disputed, but according to the report, it’s not common for the credit bureaus themselves to resolve issues with customers.

To check your credit report for errors, simply request a free copy of your report by visiting AnnualCreditReport.com. You are legally entitled to one free credit report from each of the three primary credit bureaus every year upon request.

Bad credit is scary, but fixing your score might actually be easier than you think. To learn more about how you can improve your credit score, check out these other posts and articles from OppLoans:

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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.