Side Effects of Bad Credit
Bad credit is a challenging situation to be in. It can prevent you from doing the things that you want and need to do, such as buying a house or renting an apartment, getting a job, and even buying your first car. The good news is that it's not permanent — you can repair your credit after taking some proactive steps. And while we're on the topic of living with bad credit and what it means for your financial future, let's explore some of the potential consequences of having poor credit:
Higher mortgage rates
Your loan will likely have significantly higher mortgage rates if you have a low credit score, which can increase the overall cost of buying a house.
Mortgage lenders are usually concerned about applicants with poor credit histories because they are more likely not to pay amortization, which would cause them to lose money. If you're looking to purchase a house with a conventional loan, you'll need a FICO (Fair Isaac Corporation) score of at least 620.
Borrowers can sometimes get an FHA (Federal Housing Administration) mortgage with scores as low as 500. However, they would put down at least 10% and pay mortgage insurance, increasing their overall borrowing costs by hundreds or thousands of dollars each year.
If you have bad credit, chances are you won't qualify for certain types of mortgages — and if so, this could mean less freedom in choosing where and what type of home to buy.
More expensive car loans
If you want to buy a car with bad credit, expect to pay more than someone with excellent credit. This is because lenders assume that customers with poor scores are at higher risk and will default on their loans more often than those with high scores. As such, they demand higher interest rates as collateral against these risks — which translates into higher monthly payments for consumers.
If you have a FICO score below 650 and need a loan for an auto purchase, your best bet is probably to use your savings instead of taking out a loan from a bank or credit union (unless there's no other choice).
Higher insurance premiums
In addition to the interest rates you will pay on loans and credit cards, a poor credit score can have an impact on your ability to purchase insurance policies. Insurance companies use information from your credit report (like whether or not you pay bills on time) to determine if they will offer you coverage and how much they'll charge if they do offer it.
When purchasing insurance, you’ll have a score similar to a credit score that is based on much of the same information, but it also considers how likely you are to file a claim. The higher your risk level is determined by the insurance company, the more expensive your premiums will be.
Even though your credit score won't directly affect your car insurance premium, if your credit score is below 600, you may not be eligible for the lowest rates. So while having excellent or even good credit won't necessarily save money when buying car insurance (because driving records also play a role), bad credit certainly makes things worse for drivers looking for cheap car insurance quotes online.
Utility deposits
Utility deposits are one of the most common ways to pay for services when you have bad credit. If you have a poor payment history, you will have to provide the utility company with a deposit to get their service. The security deposit will be charged upfront before you can establish a service in your name. Depending on your credit history, these deposits can range between 2% and 10% of the required bond amount.
Utility deposits are often higher for people with bad credit because there is less of a chance that they would be able to pay back any money owed if they miss payments later down the line.
Trouble renting an apartment
Your bad credit could cost you if you want to rent a new place. Some landlords will run credit history checks. Not only will they be less likely to accept applications from people with a lower score, but even if they are approved for an apartment, it may also be more difficult to get approved for certain units.
It's not impossible to find an apartment with low-enough standards that they'll rent to someone with poor credit. But if you do manage it, there may be strings attached — you could have higher fees than usual, or your application might not go through without the help of a cosigner or a larger security deposit.
Difficulty landing a job
Imagine this: you're applying for a new job, and the human resources manager asks for your credit score. You may be tempted to hide the fact that you don't have one, but keeping things hidden won't do you any favors in this case — especially since some employers review a candidate's credit history during the application process to learn more about how reliable and responsible you are.
In most states, employers are allowed to review the credit reports of job applicants and employees. According to a 2016 CareerBuilder survey, 72% of employers said they run a background check on every new hire, while 29% ran candidates' credit as part of their evaluation process.
No credit/high-interest credit cards
You may believe that it's time to stop using credit cards altogether if you have bad credit. But this is not the case. Many low credit limit cards are available for consumers with lower credit scores, which can help you build your credit score over time. However, these cards do not come without their own set of drawbacks: Interest rates on these cards can be extremely high — as high as 29% compared to the current average of around 14.51%.
These cards may also charge annual fees and often don't offer rewards like cash back or airline miles. That said, they're still better than having no card at all and can help improve your credit over time by using them responsibly in combination with other strategies (like paying off your balances on or before the due date).
Denied loan applications
Getting a personal loan or line of credit can be difficult if you have bad credit. Some lenders may also be reluctant to offer installment loans because they're more likely to go unpaid if a borrower's finances take a turn for the worse. Although this doesn't mean that people with poor credit are ineligible for loans altogether, their options will probably be limited once major banks and lenders have turned them down.
Calls from debt collectors
Debt collectors are not the problem. The bad credit that leads to debt collection calls is the problem. Debt collectors are simply doing their job, which is trying to get you to pay your bills on time so they can earn a living by collecting from you. People who work in collections are paid based on how much money they bring in for their company, so it makes sense that they will be persistent when trying to collect from you and other people like you who owe them money.
The main reason why many people dislike debt collectors has nothing to do with their job performance or attitude; rather, it's because most debtors have no idea how much money they owe until a collector calls them!
The bottom line
We hope this post has helped you understand how a bad credit rating affects your finances. As you've seen, there are many important reasons why it's so critical to maintain a good credit score — from buying a house or renting an apartment to getting a job or applying for loans.
And if you find yourself struggling with debt, plenty of resources are available to help you! But no matter what type of situation we find ourselves in, the first step is always knowing where we stand right now — and not being afraid to ask others for help along the way.
If you need any help with getting a car loan, Davis Acura in Philadelphia is here to assist you! Get a quote now on the car you'd like so you can determine your options.