Bad Credit Credit Cards
How a Bad Credit Score Negatively Affects You
Having a bad credit score as a US citizen can reflect very badly on the opportunities that emerge as you try to live your life. As you probably know, people with poor credit scores tend to encounter many more challenges and obstacles than those with good credit, while they get next to no benefits and features.
Some of the most common issues are the inability to get a loan or open a new credit card, but that is rather tiny compared to bigger issues, such as not being able to rent an apartment or even find a job. These are life-altering issues, and we want you to be fully aware of the effects that a bad credit score brings, so you would know exactly what is at stake.
What is a bad credit score?
Let’s start from the beginning and explain what is considered a bad credit score. While there are several credit score models, we will use the most commonly considered one, which is the FICO credit score. This model groups credit scores into 5 categories.
- Exceptional credit (800+)
- Very good credit (740-799)
- Good credit (670-739)
- Fair credit (580-669)
- Poor credit (579 and below)
According to data from 2020, the average credit score among American citizens stood at 711, which means that the average credit score is considered good. These are mid-levels, which are good enough to take out a loan, open a credit card, and alike, as you need a minimum of 670 for these options to be open to you. Naturally, the higher your credit score, the better.
But, what if your credit score is considered only fair or even poor? Well, there are effects that will impact your life quite a bit.
What happens if you have a bad score?
The effects of bad credit can reach far and wide, as credit expands to numerous areas of both professional and financial life of each US citizen. So, if you have bad credit, you could run into some or all of the following issues.
1. Very few credit card options (with high-interest rates)
If you have bad credit, you are likely going to find it very difficult to get approval for a credit card. As far as regular credit cards go. This is because the credit card issuers will check your credit score and consider you a risk, seeing you as someone who is not reliable when it comes to paying their dues, and so they will not risk offering you a credit card. There are still credit cards available to you, however, such as secured credit cards, or credit cards made especially for people with poor credit scores. However, they do not carry the perks that you would get with a regular credit card, and you will likely have significantly higher interest rates — often twice as high as what people with regular credit cards get.
2. High insurance premiums
Bad credit can also negatively impact your insurance, as the insurance companies will assume that you are likely to miss your payments, and so they will request much higher insurance premiums.
Insurance premiums is typically based on credit-based insurance scores, which is a different thing from a regular credit score. But, credit score still plays a part, and if it is bad, you will suffer the consequences.
3. Expensive car loans
Moving around in the US can be quite a challenge without a car, which is why most people opt to purchase a vehicle. The easiest way to do so is to take out a car loan, but once again, your credit history might interfere with the process. Your application might be rejected entirely, and even if it is not – it will still have a severe impact on the kind of rates you will get. To put this into perspective, a strong credit score can result in interest rates of 4.19%. A bad credit score can push the interest rates more than five times, resulting in interest rates as high as 20%.
4. Extreme mortgage rates
Expensive rates will not end with car insurance rates, either. Mortgage lenders, for example, will also hesitate to help you out, as they will assume you are more likely to default on your mortgage. Technically speaking, there is no credit score threshold that you need to pass in order to qualify for a mortgage, so no matter how bad the situation is, you will not be automatically disqualified. However, it is possible for this to happen. And even if it doesn’t and you do get a mortgage, your mortgage rates could be astronomical.
5. Inability to rent an apartment
Even something like renting out an apartment and securing a roof over your head can be severely impacted by bad credit scores, as most landlords will run a credit check in order to understand who they are dealing with. Based on that, they will compare applicants for the apartment, and likely choose the individual with the best credit score, as they are far more likely to make rent payments on time.
To be precise, landlords will not be able to see your precise credit score, but they will see your credit report, specifically your payment history. They will be able to see whether you were evicted in the past, and they will draw their conclusions based on that data. It is true that not all landlords will do this, but large property management companies will almost certainly go through the process when deciding on who will be their next tenant.
6. Security deposits for utilities
Utility providers have also been known to take the users’ credit report, especially focusing on their payment history, in order to set up their account and decide whether or not they should take a deposit for their services.
According to the FTC, utility firms that require deposits must either ask them of all new customers or none of them. And, while the firms have been known to give up on deposits as long as the new user meets their credit requirements, those who do not are likely to be charged a deposit during the account setup procedure. This can sometimes be avoided if the customer can provide a letter of guarantee signed by someone who would be willing to agree to make the payment on behalf of the user, if the user cannot do it on their own.
7. Rejected job applications
A lot of people are not aware of this, but bad credit can even negatively impact your chances of getting a job. When you apply for the job, your employer might turn to your credit report in order to assess how responsible and reliable you are. Again, they are most likely to check out your payment history and see whether you have a habit of being late with payments, whether there is a history of defaulting on loans, and alike.
8. Inability to start your own business
Starting a business is a great way to ensure steady funds, and if you have a good idea and an even better business plan, you could even grow it into a major company. However, in order to get there, you first need to start, and that requires money — an initial investment that is entirely on you. Most people would take out a loan in order to start, but this can once again become difficult, if not impossible, without a strong credit score. And, as mentioned before, even if you did somehow manage to convince the lenders to grant you the money, they will still likely charge massive interest rates.
How can you turn things around and build good credit?
As we have just seen, the situation can end up looking pretty bad if you allow your credit score to sink. However, there are ways to make up for it and build a healthy, strong credit score, and alongside it, credit report. Here are top 5 tips on what you can do to fix things.
- Make your payments on time. The first thing to do, and the easiest step, is to start making your payments on time. Do not allow yourself to be late, as your payment history makes up 35% of your total credit score. And, as we have seen, landlords, lenders, jobs, and pretty much everyone else will definitely check out your payment history before they even consider collaborating with you.
- Pay your old debt. In your credit report, you have a part called credit utilization ratio, which shows your available credit vs your current debt. This ratio represents 30% of your credit score, and the more debt you pay, the better it will look like.
- Get a new credit card. As mentioned, bad credit score can prevent you from getting a regular credit card. However, you can still get secured credit cards or credit cards for people with bad credit. Both are easy to receive, and both can help you improve your credit score if you use them responsibly.
- Check your credit report. The system is not perfect, and mistakes can happen, even when it comes to your credit report. This is why it is a very good idea to keep an eye on your own credit report and see if there are any errors that might be pushing your credit score down.
- Monitor the changes in your credit score. Finally, we recommend keeping an eye on your credit score itself, and seeing how it changes as you start making responsible financial decisions.
Conclusion
Living with bad credit score will deny you incredibly many opportunities that would otherwise lead to a better and more successful life, and you need to be aware of what is at stake. With this knowledge, you can now set off on the road to fixing the situation, improving your score, and maintaining it at a greater height. Anyone can do it with the will and enough discipline, and before you know it – new opportunities will start opening up.
