The Side Effects of Bad Credit

Bad credit can have many negative repercussions. If you’re used to paying your bills after the due date, late fees probably won’t be your only problem. Bad borrowing habits erode your credit, making it much harder to get loans in the future. They can also make it difficult to get a mobile phone contract or even get certain jobs. Here are some of the possible consequences.

Key points to remember

  • Bad credit can make it harder to get car and home loans and get credit card accounts. You may need to start with a secured credit card to build your credit.
  • Even if you are offered a loan, chances are it will be at a higher interest rate.
  • Consumers with lower credit scores generally pay more for car, renter’s and homeowner’s insurance.
  • Employers may do a credit check before offering you a job, especially if you’re applying for a managerial position or a position that involves handling money.

Bad credit means difficulty getting a loan

It’s probably no surprise that before giving you a new loan, banks want to know how likely you are to repay them. One of the main ways they do this assessment is by ordering your credit score from providers like FICO and VantageScore. These credit scoring models use information from your credit reports, from loan balances to payment histories, to assess your creditworthiness.

A low score can make it harder to borrow, whether it’s a car loan, a mortgage, or a credit card account. And if you qualify, you’ll likely have to pay higher interest rates to offset your high level of default risk. Many credit card issuers, for example, require a credit score that falls between “good” and “excellent,” meaning a FICO score of at least 670 and a VantageScore of 700 or higher.

If you’re looking to buy a home with a conventional loan, you’ll need a FICO score of at least 620. Borrowers can sometimes get an FHA mortgage with scores as low as 500, although you put at least 10% and have to pay for mortgage insurance, which will increase your overall borrowing costs.

If your credit is less than stellar and you are facing a financial emergency, you may need to borrow money quickly to help you get through the situation. Although credit issues complicate the process of obtaining an emergency loan, you may still have access to various emergency loan options.

670

The minimum FICO score needed to get many credit card accounts.

Fewer rental options

Homebuyers aren’t the only ones who have to worry about a spotty credit history. It can also come back to haunt you when you try to rent. As with banks, landlords like to assess your ability to pay them on time before handing over the keys to a property. Therefore, they will usually get your credit report as part of the application process.

If you’ve made borrowing mistakes in the past, finding a new place can be difficult. There are several ways around bad credit – you can get a co-signer or offer to pay a higher security deposit, for example – but it’s much easier to get in with a respectable score.

A good credit history can be just as important for older people as it is for younger people. Medicare typically does not pay for long stays in a nursing home or assisted living facility, so these facilities rely on private payments. They often do a credit check before making an admission to make sure an applicant can pay the bill.

You should always know your credit score before trying to borrow money.

Higher insurance costs

Here’s something many consumers don’t anticipate when they run up a big credit card bill or fall behind on their mortgage: paying higher car insurance premiums. And yet, that’s exactly what happens with some insurance companies (although some states prohibit the practice).

If you’re wondering why that’s the case, it’s because of research showing a correlation between poor credit scores and the likelihood of drivers filing a claim with their car insurance company. The worse your credit, the more likely you are to blame for an accident. A 2019 report from The Zebra, an insurance comparison site, found that drivers with poor scores paid more than double those with outstanding scores.

Other types of insurers may also review your credit reports. For example, some tenant and homeowner policies use a proprietary credit scoring system to determine your rates. Although life insurance companies don’t typically use credit scores in the underwriting process, it may be harder to get a policy or get their best rates if you’ve recently gone bankrupt.

Pay a deposit for utilities

Bad credit is often a hindrance when trying to set up an account with a utility or internet company. Customers with lower credit ratings may have to pay a deposit before signing up, which acts as insurance if you don’t pay your bill.

Even establishing service with a cell phone provider can get a little trickier if you can’t show a good borrowing history. Some require users with lower credit scores to use a prepaid plan or put down a deposit. You may also struggle to qualify for the best deals on most wanted phones.

Difficulty getting a job

The next time you go for a job interview, your potential employer may not only ask you for a list of references, but also permission to perform a credit check. Why? For some roles, including management positions and jobs that involve managing money, companies want to know that the person they hire can be trusted when making financial decisions.

According to a 2016 CareerBuilder survey, 72% of employers said they perform background checks on every new hire, and of those, 29% assess the candidate’s credit as part of the assessment process. Letting your credit score languish can not only cost you money in the form of expensive loans. It can also limit your ability to earn money.

The essential

A bad credit history can have wider consequences than you think. Not only will a patchy credit report lead to higher interest rates and fewer loan options; it can also make it more difficult to find accommodation and obtain certain services. In some cases, this can work against you in a job search. If it’s been a while since you last checked your credit report, it might be time to see where you stand.