Bad credit can have many negative repercussions. If you're in the habit of paying your bills after the due date, penalty fees won't be your only problem. Late payments and other poor borrowing habits erode your credit, which can make it a lot tougher to get loans in the future. They also can make it hard to get a cellphone contract or even land certain jobs. Here are just some of the possible consequences.
Key Takeaways
- Poor credit can make it harder to get car and home loans, and to qualify for a regular credit card—you may need to start off 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 often pay more for auto and homeowners insurance.
- Employers may run a credit check before offering you a job, especially if you're applying for a management position or one that involves handling money.
Bad Credit Means Trouble Getting a Loan
It probably doesn't come as a surprise that before handing you a new loan, banks want to know how likely you are to pay them back. One of the primary ways they make that assessment is by ordering your credit score from companies such as FICO and VantageScore. Their credit-scoring models use information in 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, mortgage, or credit card account. And if you do qualify, you'll likely have to pay higher interest rates to make up for your greater level of default risk. A lot of credit card issuers, for instance, require a credit score that's either "good" or excellent." That means a FICO score of at least 670 or a VantageScore of 661 or above. Both FICO and VantageScores range from 300 at the bottom end to 850 at the very top.
If you're looking to buy a home with a conventional loan, you'll typically need a FICO score of at least 620. Borrowers can sometimes get an FHA mortgage with scores as low as 500, although they would need to put down at least 10%. Otherwise, FHA loans require a score of at least 580.
Unlike home mortgages, there is no widely used minimum credit score requirement for car loans. However, borrowers with bad credit can expect to pay substantially higher interest rates. An American Express analysis based on 2019 data found that borrowers with credit scores of 781 and above paid an average interest rate of 4.23% on a $32,000 new car loan, while those in the 300 to 500 range paid 14.7%. The difference was even more dramatic for used cars.
Tip
If your credit is less than stellar and you face a financial emergency, you might need to borrow money in a hurry to help you weather the situation. While credit problems complicate the process, you may still be able to access a variety of emergency loan options.
Fewer Renting Options
Home buyers aren't the only ones who have to worry about a spotty credit history. It can come back to haunt you when trying to rent, as well. As with banks, landlords like to size up your ability to pay them on time before handing over the keys to a property. Therefore, they'll typically obtain your credit report and/or credit score as part of the application process.
If you've made some borrowing blunders in the past, getting a new place can be tough going. There are some ways around bad credit—you can get a cosigner or offer to pay a higher security deposit, for instance—but it's much easier to go in with a respectable score.
A good credit history can matter just as much for older adults as for younger ones. Medicare doesn't typically pay for long stays at a nursing home or an assisted living facility, so these establishments rely on private payments. They often run a credit check before making an admission to be sure that an applicant can pay the bill.
If you're turned down for credit, the lender is required to either tell you why or explain how you can find out, under the Equal Credit Opportunity Act.
Higher Insurance Costs
Here's something a lot of consumers don't anticipate when they rack up a big credit card bill or fall behind on their mortgage: paying higher auto insurance premiums. And yet that's exactly what happens with some insurance carriers (although some states prohibit the practice).
If you're wondering why that's the case, it's because insurers often use credit-based insurance scores to set a particular driver's rates. While not the same as credit scores, they are also based on the information in the individual's credit reports. According to the auto insurer Progressive, "Credit information is very predictive of future accidents or insurance claims."
Other types of insurers may also be taking a look at your credit reports. For example, some providers of renter's and homeowner policies use credit-scoring systems to determine your rates. While life insurance companies don't typically use credit scores in the underwriting process, it may be harder to get a policy or obtain their best rates if you have a recent bankruptcy on your record.
Paying a Deposit for Utilities
Bad credit is often a hurdle when trying to set up an account with a utility or an internet company. Customers with lower credit scores may have to pay a deposit, which acts as insurance should they fail to pay their bill.
Even establishing service with a cellphone 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 have trouble qualifying for the best deals on more-sought-after phones.
Difficulty Landing a Job
The next time you interview for a job, your potential employer may not only ask for a list of references but also permission to run a credit check. Why? For certain roles—including management positions and jobs that involve handling money—companies want to know that the person they're hiring can be trusted when making financial decisions.
According to a 2016 CareerBuilder survey, 72% of employers said they run a background check on every new hire, and, of those, 29% check the candidate's credit as part of the evaluation process. Letting your credit score languish may not only cost you money in the form of expensive loans. It colud also limit your ability to earn money.
What Is a Secured Credit Card and Where Can You Get One?
Secured credit cards don't provide a credit line but require the cardholder to leave a sum of money on deposit with the issuing bank, which the person can then borrow against. Secured cards are easier to obtain than regular, unsecured cards and many major credit card issuers offer them. After using a secured credit card responsibly for a period of time, the cardholder can often graduate to a normal card.
How Can You Learn Your Credit Score?
You can obtain your credit score free of charge from many banks and credit card companies. There are also reputable websites where you can get a free credit score. Bear in mind that there are a variety of different scoring systems, so you probably have multiple scores and they may not all match. However, you are very unlikely to have a bad score with one and a good score on another.
How Can You Improve Your Credit Score?
Your credit score is based on several factors. The two most important are your payment history (accounting for 35% of your FICO score) and amounts owed (accounting for 30%). You can improve your payment history by paying all of your credit bills on time and your "amounts owed" by maintaining a low credit utilization ratio. Your credit utilization ratio compares how much revolving debt (such as credit cards) you currently have outstanding with the amount of credit you have available to you. Lenders and credit scores favor credit utilization ratios under 30%.
The Bottom Line
A poor credit history can have wider-ranging consequences than you might think. Not only will a spotty credit report and low credit score lead to higher interest rates and fewer loan options, it can also make it harder to find housing and obtain certain services. In some cases it can count against you in a job hunt. If it's been a while since you took a peek at your credit report, this might be a good time to see where you stand.
