If you have bad credit, you might have more trouble taking out a credit card, car loan or mortgage—and once you do get accepted for a credit card or loan, you can expect to pay higher interest rates. The consequences of bad credit can even extend to your job search or apartment hunt, since both employers and landlords want to work with people who have a history of managing money responsibly.
However, you don’t have to let bad credit keep you from achieving your long-term financial goals. Here’s what you need to know about how bad credit can affect your day-to-day life, how to find credit cards and loans for people with bad credit and how to quickly boost your credit score.
What is a bad credit score?
FICO credit scores are grouped into five different categories:
- Exceptional credit: 800+
- Very good credit: 740 to 799
- Good credit: 670 to 739
- Fair credit: 580 to 669
- Poor credit: 579 and lower
Data from credit reporting agency Experian for the second quarter of 2019 shows that the average FICO credit score among American consumers is 703. This means the average person has good credit according to most lending standards. If your credit is significantly below the average, you might find that certain aspects of your life are more difficult—or more expensive.
Bad credit might make it harder to get a credit card
According to a recent Bankrate survey, 28 percent of Americans have had a credit card application denied because of their credit score. Having bad credit can make it more difficult to access new lines of credit, which is unfortunate because increasing the amount of credit available to you is one of the best ways to improve your credit score.
You may need to consider a secured credit card, in which you put down a small deposit in exchange for a small line of credit. This deposit protects the credit card issuer if you fail to pay your balance or otherwise default on your credit obligations. If you use your card responsibly, you should get your deposit back relatively quickly—and both your line of credit and your credit score should start to improve.
Although the best rewards credit cards are often only available to people with good or excellent credit, it’s still possible to get a good credit card with a bad credit score. If you’d like to learn more, take a look at our list of the best credit cards for people with bad credit as well as our guide to getting a credit card with poor credit.
A low credit score might make it more difficult to get loans or mortgages
Not only is it harder to get a credit card with a low credit score, but it’s also harder to take out loans, including mortgages. When you do find a lender willing to offer you a mortgage, car loan or personal loan, the interest rates will often be higher than the rates for people with good or excellent credit. That means you’ll pay more money over the life of your loan.
However, there are resources for people who want to get loans and mortgages with bad credit. We’ve got guides to help you get a mortgage with bad credit, get a car loan with bad credit and take out a personal loan with bad credit.
Don’t let your bad credit keep you from applying for the loans you need. Although you might want to wait until your credit improves in order to secure a more favorable interest rate, taking out a loan with bad credit can also be a way to boost your credit score. Why? Because the credit bureaus like to see a mix of credit (that is, both credit cards and loans) in a person’s credit history. Credit mix makes up 10 percent of your credit score, so use that to your advantage—and make sure you manage those loans responsibly once you have them.
Your poor credit history might hurt your job search
Having bad credit may also make you a little nervous about applying for a new job in case a potential employer does a background check. Unfortunately, this does happen more than you might think. In 2016, a CareerBuilder study revealed that 29% of 2,379 hiring and human resources managers ran credit checks before extending an offer to a candidate.
Potential employers won’t actually have access to your credit score or full credit report, though. Instead, they’ll see a simplified version of your report with details on your payment history and what you owe. They also need your consent to run a credit check on you, so you don’t need to be concerned that this is affecting your application without your knowledge. However, denying a request for a credit check is likely a red flag on your application, and if allowing the check reveals a history of missed payments or other negative marks on your credit report, an employer might be more hesitant to hire you.
How to build good credit
If you’d like to improve your credit score and build good credit, here’s what you can do:
- Make on-time payments on all of your credit cards and loans. Your payment history makes up 35 percent of your credit score, so don’t let late payments drag your score down.
- Pay down old debt. Your credit utilization ratio—that is, your available credit vs. your current debt—makes up 30 percent of your credit score. Pay off more debt, and your score should go up. If you are paying off a lot of high-interest debt, consider a balance transfer credit card or a debt consolidation loan to reduce your interest burden.
- Take out a new credit card or loan. This might sound counter-intuitive, but applying for a secured credit card or a personal loan for bad credit can actually improve your credit score. Not only will you increase your credit utilization ratio, you’ll also have the opportunity to prove your creditworthiness by making responsible, on-time payments.
- Check your credit reports for errors and incomplete information. If you find incorrect information, disputing the data with the reporting agencies can make a huge difference in your score. You can get a free copy of each of your reports once per year from com.
- Check your credit score regularly. Bankrate offers a free credit score and monitoring service that offers expert advice on how to improve your credit score.
The bottom line
While bad credit can make it harder to access credit cards, loans and mortgages—and might even affect your job prospects—there are plenty of ways to improve your credit history and build your credit score. Start by making on-time payments on all of your current credit cards, and begin paying down your old debt. Consider taking out a secured credit card or personal loan to build a positive credit history and increase the amount of credit available to you. Your credit score should improve as you continue to practice good credit habits and use credit responsibly.
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