Bad Credit Affects You In More Ways Than You Realize
Credit scores are a tangled web for many. The equation that brings disparate financial details together to evaluate an individual's "creditworthiness" can seem like a puzzle box with no true answers. Indeed, TransUnion produces 21 unique FICO credit scoring products, and the other two major credit bureaus offer 16 apiece.
Dialing in on exactly what your score is and how it's formulated can therefore seem like a hopeless endeavor. Besides, if your score isn't exceedingly bad, there's no real consequence, right? It's easy to see this fluctuating number (as well as different numbers reported in each credit card app and credit monitoring service you use) and think that it doesn't hold any real-world significance. But this is a mistake. In truth, credit scores can play a role in far more than just the approval process for a new loan or line of credit. While a score of 620 will generally enable the use of a mortgage to purchase a home, there are plenty of reasons to focus on boosting your score far above this baseline figure. A low credit score can throw a wrench in many plans, across a wide swath of common lifestyle categories and dreams. In addition to lending woes, these are the lesser-known ways in which a poor credit score can hamper your efforts throughout life.
Higher interest rates
First and foremost, getting a new credit card or gaining approval for a loan comes with slimmer odds for those with lower credit scores. Many card companies publish minimum score requirements for applicants, helping people avoid making a hard inquiry for a card that they never would have been approved for.
When success does come after a credit application, lower scores correlate with higher interest rates attached to the offer. This is commonly known and widely reported on, but it's worth remembering as a centerpiece in any manner of thinking about credit, borrowing, and consumer spending. Many people know about this relationship but are still shocked when they see an astronomical APR figure on a new borrowing application. At its most visible, poor credit management translates into less attractive financing options that end up costing more money. The woes that follow alongside a poor credit score begin with weaker odds of approval on just about any borrowing product and higher interest rates. You may also be subjected to increased origination fees on personal loans and retail financing on things like a new car or appliances for the house. But these aren't the only troubles that befall those with low credit scores.
Renters may have trouble finding a new place
Credit scores can affect quasi-financial features in a person's typical lifestyle as well. On top of creating more expensive borrowing calculations, a low credit score can translate into difficulty in finding a place to live. For renters, a common part of the application process when looking for a new place to live is the inevitable background track run by the landlord or rental company. Background checks help homeowners identify potentially problematic tenants before they sign the lease end game occupancy of the property.
Landlords are often looking for things like a history of delinquent rent payments, criminal issues that might point to malfeasance in the home, or previous issues with squatting. Generally speaking, landlords want to know that their tenants will take care of the home, pay rent on time, and leave at the end of the tenancy if it isn't renewed. But landlords can also seek out credit reports on potential tenants, giving them a more comprehensive picture of the person they're thinking of signing a lease agreement with. A lousy credit score will almost certainly act as a red flag for any landlord who includes credit checks in their due diligence.
Credit histories can influence insurance premiums
Insurance companies also can look into consumer credit histories. In nearly every state across the country, an insurance company can raise rates on policyholders based on their credit score. There are some protections spread out across the United States in this regard but the overwhelming reality is that individual debt management practices can result in more expensive insurance coverage for a variety of essentials like homeowners insurance, car insurance, and health insurance. For car owners in Hawaii, homeowners in Maryland, and those living in California or Massachusetts (and shopping around for any type of insurance product), this practice that feels a lot like credit discrimination is banned, but residents of the other 46 states are out of luck when it comes to insurance premiums and the influence of an adverse credit history.
The rationale used by insurance companies here is that a correlation exists between credit scores and the number of claims filed by policyholders. It's unclear whether this relationship exists or not, but insurance companies use this rationale to charge higher rates to those with lower scores in the same way that health insurance becomes more expensive when factoring in pre-existing conditions and other complications.
Those with poor credit scores may have to pay a utilities deposit
In addition to higher premiums on essential services, people with bad credit scores can occasionally expect to fork over more cash for essential utility services. While utility companies won't charge you more, including for those that aren't strictly essential like internet (although the UN considers it a necessity today) or TV services, they may impose deposit requirements before setting up your account.
The reality is that a bad credit score signals an unwillingness or inability to repay debts on time or with good management strategies. It's important to remember that a bad credit score doesn't mark you as a bad person but it does act as a red flag for companies thinking of offering their services in an ongoing consumer relationship. A deposit for utility services can act as an additional gut punch. Not only does a lower credit score create more expensive borrowing terms but with this requirement in place it demands upfront cash that may be in limited supply to start using essentials like electricity and water in a new home.
Many of the best rewards credit cards remain out of reach
It's almost unnecessary to mention, but just as a high credit score unlocks reductions in interest rates and improved repayment terms, a great credit score also makes for improved eligibility for those seeking the best credit cards around. Cards with astronomical limits (creating a significant boost to your credit utilization rate when opened), those with excellent rewards programs, and cards that include luxurious perks like concierge services or lounge access passes when traveling are only available for those with the best credit scores. A good credit score generally means a history of good debt management, so credit card companies and lenders will typically be willing to work with these kinds of borrowers with fewer restrictions or reservations.
On the other hand, people with bad credit scores may have to settle for using a secured card, or one that doesn't offer any direct rewards benefits. However, opening a card like this does provide an opportunity to showcase high-quality money management practices that will ultimately translate into an improved credit score over the long term. Those with low credit scores can turn things around to create a glowing credit history that ultimately unlocks these better rewards in the future.
Vastly more expensive homes await those with low credit scores
Mortgage rates are higher for those with lower credit scores, much like any other lending product. But mortgage loans are unique in their longevity, making a higher interest rate something that can add drastically to the overall price tag of a purchase.
As of early December, the average mortgage rate in the United States sits at 7.66%, with some of the best offers hovering roughly 1% lower (6.57%). Because these figures are higher than what might be considered a typical mortgage rate, it can be easy to lose track of what that 1% difference signifies. When it boils down to the raw figures, A 1% difference equates to roughly $100 added or subtracted to your monthly payment. The result is a total loan cost that's tens of thousands of dollars more expensive. This discrepancy affects first-time buyers in particular, since new homeowners may not be completely aware of all the financial nuances of their mortgage. By the end of the first year, a borrower with an interest rate of 1% higher than the average will pay about $1,200 more. Put into a different context, that money could be leveraged to pay off other debts, saved for retirement, or even put directly toward a family vacation every year. A higher interest rate — offered as a direct result of a lower credit score — means missed opportunities elsewhere in life and a far more expensive home in the process.
Debt consolidation loans may not be available
Personal loans designed to help pay off debt may not be an option for those with low credit scores. As with any type of lending product, debt consolidation loans are offered with minimum requirements and other lender-specific criteria governing the approval process. Loans designed to help people manage their debt more effectively may showcase greater leniency and approval rates than those used to purchase new goods, but this doesn't mean that anyone applying for a loan will receive blanket approval.
As with any lending product, your credit history and other personal details play a role in gaining access to funds. Some lenders may allow borrowers to leverage additional data points about themselves like education level. Even so, at the end of the day, your credit score remains king and a dreadful history of debt management will ultimately be difficult to overcome. If you aren't able to take advantage of a debt consolidation loan, you may be looking at longer repayment timelines, higher interest additions, and other repayment difficulties that must be kept up with. It's certainly not impossible to pay off multiple credit cards in their entirety, but with consolidation options on the table, you'll have more tools at your disposal to quickly and efficiently reduce your debt burden.
Retirement and other savings goals may end up being put off
One feature of a bad credit score that strays beyond the realm of debt repayment is savings volume. It's likely that if you have a bad credit score, you're managing a significant monthly repayment burden on credit cards, student loans, and other past personal borrowing. A large portion of income directed to debt repayment can severely impact your ability to save for the things that matter most to you. If your credit card bills are eating up 50% of your monthly paycheck, for instance, there may not be enough left over to manage your housing costs, utility bills, and contribute to your retirement savings fund.
Retirement savings, in particular, requires consistency over the long term. The more money you're able to put away in your younger years, the less stressful your final years in the workforce will be. Time is a massive ally when it comes to building retirement savings, and any month that you don't contribute to your 401K or IRA accounts because of a large credit card bill translates into years of compounded interest lost. Similar concerns remain for other savings goals. Building an emergency fund can help see you through tough times without adding to your debt burden while saving for large purchases like a new home also requires long-term thinking and consistent contributions.
Job opportunities may be slimmer
One area where your credit score might not seem that important is in the workplace. The way you manage your money is none of your employer's business after all, right? While there's certainly a ring of truth to that statement, the reality is that in many roles your employer can and perhaps may add credit checks into the mix of background vetting for promotional opportunities or in conducting new hiring.
This is particularly prevalent among roles in which an employee will be responsible for company-wide management or in a custodial position over finances. Accountants must be excellent money managers to successfully perform their duties. Therefore, businesses may opt to rely partially on information about a person's financial management habits and history to understand if they will be a good fit for the company. All things being equal, a poor credit score might see you passed over for a new job or a promotion in favor of someone with better personal debt management habits. Yet again, credit scores can have a way of piling on the bad. If you've been gunning for a promotion at work that could transform your budgetary math and help pay down old debts faster, the negative impact of that spending history can come back to bite you.
Starting a business will be more challenging
For those who have a great idea and want to turn it into a business, a bad credit score can severely hinder the fruits of an entrepreneurial spirit. Many businesses are launched with the help of borrowed capital. These funds are later paid back with the help of the business' profits. Business loans offer a different kind of relationship than personal ones, but individual entrepreneurs remain the driving force behind the companies these funds help create.
Banks typically won't want to work with borrowers with poor credit scores, regardless of the purpose of their application. This goes for auto financing, personal loans, and business loans. Even if you have a phenomenal business idea that's virtually guaranteed to rake in profit, if your credit score is terrible then you remain a severe lending risk to creditors. Similarly, business owners who are successful in financing a startup or franchise location will be beholden to the monthly repayment requirements from their lender. Much like the woes of a high-interest rate on your home loan, if you're forced to pay back a significant dollar amount every month on your business loan, meeting the requirements of service and the debt can encroach on your efforts to expand the business. Every company in the modern marketplace has to balance big ideas and opportunities against the necessity to create profit. With high repayment obligations, creating earnings in the present naturally takes priority over long-term growth strategies.
A bad credit score makes life more expensive
On the whole, things are more expensive for lower earners and those with poor credit histories. The almost ubiquitous use of credit cards in the modern world has resulted in a near-universal inflation of prices on goods and services to account for interchange fees charged by card companies to merchants. This reduces the functional value of a low earner's paycheck, and the same can be seen in the spending power of those who can't take advantage of rewards credit cards or carry balances and therefore enjoy diminished value from them.
Similarly, those with high credit card balances and low credit scores suffer from a reduced ability to take advantage of savings opportunities. They may be less prepared to buy in bulk and therefore take advantage of cost-per-unit savings. In a million and one ways, the credit score that reflects your unique borrowing profile and attempts to summarize your risk to lenders can impact your buying power and the value that you enjoy in everyday financial transactions. As a result, it is strategically important to pursue credit-building avenues that will help you slowly ramp up your score over time. Building great credit isn't something that happens overnight, but making small improvements whenever you can will help you make the most of your money in this world that's driven in large part by capital forces.
Important life decisions can end up being put on hold
Finally, in addition to how bad credit creates more expensive consumer relationships and weaker buying power, a rough credit history can also hinder your big life decisions. Recent reporting on American consumer sentiment has found that more than half of all U.S. adults have opted to delay an important life decision as a direct result of their financial situation.
These decisions include things like buying a long-sought vacation property, having a baby, getting married, or pulling the trigger on retirement. Delaying life-changing events is something that everyone should strive to avoid. There will always be times when you'll need to put something off in order to prioritize something else, but these should be net-positive alterations to your financial and lifestyle roadmap. The birth of a child, for instance, will likely delay any big vacations that you might have planned. But this is more of a trade than anything else. Learning that you won't be able to retire as expected can be devastating news, especially for those who work in fields that demand laser focus or are physically taxing. Bad credit creates the conditions for weaker savings and a more vulnerable financial standing. In turn, the likelihood of having to put a big decision on ice increases.