Chances are that you’ve stood on the brink of buying something you couldn’t afford or you’ve considered skipping a bill payment.
You wondered, “Is a bad credit score really that big of a deal?”
As the 30% of Americans that have poor credit will tell you, yes, it is. Credit problems will impact more aspects of your life than you expect, and for longer than you realize.
In fact, most negative factors on your credit report will keep affecting your score for seven years.
Some types of bankruptcies even stay on your credit report for ten years. Here’s a look into what you could face for those seven to ten years.
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How a Bad Credit Score Affects You
In the US’s credit score system that ranges from 300-850, anything below 600 is considered poor. If your score falls into that range, you can face a long list of problems in your financial life and beyond.
Problems Getting a Mortgage
Chances are that a mortgage is the largest financial decision you’ll ever make and it all hinges on your credit score.
As you seek a mortgage, you risk getting turned down by one lender after another. You’ll end up with far fewer options if any at all.
It isn’t just the “approval” stamp you need to worry about. Your bad credit loan lender will also base your interest rate on your credit score. After all, someone with bad credit is a higher risk for the lender, so they expect to pull a higher compensation.
With the high loan amounts of mortgages, a few percentage points make a huge difference.
For example, let’s say you take out a 30-year mortgage for $200,000. At 4% interest, you’ll end up paying $344,000 by the end of 30 years. A 6% interest rate will cost you an extra $88,000.
Difficulty Renting a Home
It’s easy to look at those mortgage figures above and say, “That’s okay, I’ll rent my home instead.” Bad news: even renting comes with its hurdles if you have bad credit.
Checking your credit score is a standard item on any landlord’s checklist as they decide whether to approve a renter. Unfortunately, renters aren’t providing personal loans no credit check, and a bad credit score tells them you may not have the financial reliability to pay your rent on time.
If your credit is bad but not bad enough to disqualify you from renting, you might have other issues. Many landlords set a renter’s security deposit based on their rental application, including their credit score.
Some states have laws that limit how much a landlord can charge for a security deposit. Still, that amount can add up to several thousand dollars.
Troubles with Getting a Car
On top of your living arrangements, a bad credit score can impact your transportation too.
Whether you plan to buy or lease a vehicle, you can expect that a credit check will be part of the process. If your score is low enough, you might not be able to get a vehicle at all.
As with a mortgage, even getting approval for your vehicle may come with added costs. If you’re buying a car with financing, your interest rate will be higher to compensate the lender for your risk factor.
If you have poor credit due to debt, your best course of action is to get a good job so you can pay it off, right? It’s true, but too many people find themselves between a rock and a hard place.
They need a job to improve their credit score, but their bad credit score can prevent them from getting a job.
More and more employers are checking applicants’ credit scores. They tend to see a poor credit score as an indicator that you aren’t responsible enough to be a good employee.
There’s ample evidence that there is no link between credit scores and work performance. In fact, four US states have banned employers from using applicants’ credit scores as a hiring criterion.
These include California, Illinois, Maryland, and Connecticut.
If you’re in any of the other 46 states, however, you may face problems in your job search.
Roadblocks to Entrepreneurship
So many of us have dreams of being our own bosses. When it comes to starting your own startup company, though, a bad credit score could stand in your way.
Chances are that you’ll need at least one business loan in your company’s early days. Since your company has no credit history of its own, the loan approval and interest rate are based on your personal credit.
If you have bad credit, it may be best to do some credit repair before you try to get a loan. You should also explore other options like grants or investors before you apply for a loan.
Fewer Credit Card Options
When it comes to credit, credit cards are as basic as it gets. They can be the fastest way to establish a reliable credit history.
If you already have poor credit, though, your options are limited. You might only qualify for cards with low credit limits and high interest rates.
The problem with this is that there are countless great credit card offers out there that can save you money. With a low credit score, chances are that you aren’t eligible for them.
Let’s hop back to living arrangements.
Say you’ve managed to get a mortgage or a lease and as unhappy as you are about the added costs, you’re excited to move in. Then you call your new power company to set up your account and they drop another bomb: you owe them a deposit.
Utility companies charge a deposit if they believe a new customer may be a risk. Sometimes they may waive the deposit if you provide a letter from your last power company stating that you’re in good standing with them.
As long as you hold up your end of the bargain, you’ll get your deposit back.
The power company may apply it against your future bills. Still, coming up with the extra money while you’re trying to move can be a serious challenge.
Cell Phone Struggles
These days, a smartphone is like an extra appendage. It’s how we connect with our world and depending on your job and your living situation, it’s a necessity for safety and daily life.
If you have bad credit, though, your iPhone is in jeopardy. Before a cellular company will sell you a contract, they’ll check your credit score. If it doesn’t meet their standards, you’re out of luck.
Having a bad credit score will cut down on your options for a cell phone. You might need a plan in which you buy data and minutes in advance. These plans come with added inconvenience and can cost more in the long run.
You may have difficulty buying your iPhone itself and not just the service plan.
Most cell phone providers will sell you a phone on a monthly payment plan. If your credit is poor, that may not be an option. A phone that would carry an affordable monthly payment could cost you $600 or more upfront.
Higher Insurance Premiums
Insurance is one of those necessary evils in modern life. For some types of insurance like auto insurance and homeowner’s insurance, though, you may pay more than you expect based on your credit.
Insurance companies are in the business of assessing risk.
If your credit score is low, they assume you are less responsible than the average person and are a higher risk as a result. This added risk can skyrocket your premiums in a hurry.
Hurdles to Getting Security Clearance
For some types of jobs, it isn’t just your hiring manager you need to impress.
You may need to get a governmental security clearance as well. It may surprise you to learn that a bad credit score can lower your chances of getting the clearance you need.
When the government is assessing you for clearance, they’ll check your credit. If you have a lot of debt or financial strain, it tells them you’re more likely to accept a bribe than someone who doesn’t need the money as much.
This isn’t to say that you can’t get a security clearance with a low credit score. However, it’s one of many factors that go into the decision, so the risk of denial is real.
Protecting Your Credit to Protect Your Future
Think about where you hope to be in seven years. Do you want to own a home and a vehicle? Have a better job? Have a manageable monthly budget?
All of this is in jeopardy if you have a bad credit score. As you take steps to secure your financial future like saving for retirement, don’t overlook the impact your credit score will have.
If all this talk about credit scores has you looking for ways to boost yours, check out some tips on our financial advice blog.