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- If you fall into the bad credit category, you will have less favorable outcomes when it comes to getting loans to buy a house or car, or even in the rental and job markets.
- Prospective lenders, landlords and employers, as well as others that you approach for credit, will see you as more at risk of defaulting and will charge you higher interest rates or deny you.
- You don’t have to live with a bad credit score and can proactively take steps to improve your score and your outcomes.
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.
For instance, a FICO score of less than 669 would be considered a fair score and one below 579 is rated a poor score. You should aim for at least a 620 score if you are looking for a mortgage loan to buy a house, for one.
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.
The effects of having a low credit score can reach fairly far and wide. However, you don’t have to let bad credit keep you from achieving your long-term financial goals, so let’s take a look at what some of the main effects of bad credit are.
Bad credit can mean fewer credit card options and higher interest rates
Bad credit can make a real impact when shopping for a new credit card. There are credit cards available for consumers with lower credit scores, but they don’t have as many perks or benefits as the best credit cards available to those with higher credit scores. Interest rates on these cards can be extremely high — as high as 29 percent compared to the current average of around 20 percent. If you have a strong credit score, you’ll have plenty of solid credit card options available to you with lower interest rates and good cardholder perks (think: rewards, annual credit and other more premium benefits).
Higher insurance premiums
In general, credit scores are used to determine how likely a consumer is to experience credit delinquency. This means that the lower your score is, the higher chance there is for the lender that you will miss a payment. When purchasing insurance, you have an insurance score that is similar to a credit score (and based on much of the same information), but it also takes into account how likely you are to file a claim.
Although credit scores and credit-based insurance scores are slightly different, your insurance score is still affected by your credit history as it takes into account your payment history, outstanding debt, credit history length, new credit and credit mix just like a credit score does. Typically, the higher your insurance score, the lower the rates on your policy will be.
More expensive car loans
When it comes time to take out an auto loan, your credit history will play a role in both whether you can get your hands on a loan, as well as what kind of rates you’ll receive. If you have strong credit, you may be able to find auto loan offers with interest rates as low as 4.19 percent. On the flip side, if you have a low credit score, you may be facing interest rates higher than 20 percent).
Higher mortgage rates
Mortgage lenders typically fear that applicants with poor credit histories are more likely to default on their mortgage. While there is no credit score threshold that automatically disqualifies borrowers from getting a home mortgage loan, having a low score can make it difficult to find a lender to underwrite your loan.
A credit score of at least 620 will make it easier to get a conventional mortgage loan. Even if you are able to secure a mortgage with a lower credit score, you’ll likely have significantly higher interest rates on your loan (about 7.5 percent with a score of 620 or lower, compared to 5.8 percent with a score of above 760). This makes the overall cost of buying a home much higher.
Steeper apartment competition
Some landlords will run a credit check on potential tenants during the application process in order to gauge whether or not an applicant has a strong financial history and is likely to pay their rent on time each month. Landlords can only see your credit report, not your specific credit score, and they’ll likely look at the payment history portion of a credit report. If it was reported, they can see if an applicant has been evicted in the past, which is likely to impact their decision.
Not all landlords do credit checks, but large property management companies are more likely to require one. So if you have bad credit, renting from a landlord with a smaller portfolio may be more easily attainable. Having a lower credit score can lead to a landlord’s requiring a larger upfront payment. Taking on a co-signer with a good credit history can give the landlord confidence that they’ll receive rent each month.
Security deposits for utilities
Your utility providers take your credit report, and particularly your payment history, into consideration when setting up your account. If you have a poor payment history, chances are you will have to provide the utility company with a deposit in order to get service.
Although the FTC outlines that any utility companies requiring deposits must require them for all new customers or none, many providers waive deposits as long as you meet their credit criteria. This means that the poorer your credit, the more likely you are to be charged a deposit when setting up an account. Some utility providers may also accept a letter of guarantee, which is a letter from someone who has agreed to pay your bill on your behalf if you can’t make the payment.
Unsuccessful job applications
One somewhat unexpected scenario your credit score can play an important role in is during a job search. Some employers review a candidate’s credit history during the application process in order to learn more about how reliable and responsible you are. Seeing patterns of late or missed payments or a history of defaulting on loans can be a red flag to potential employers that you won’t be a responsible, reliable employee.
Difficulty starting a business
Sometimes it takes money to make money. If you’re starting a business and need funds to make that happen, a low credit score can make it harder to obtain a business loan or a business credit card at good rates. Even if you can get your hands on a business loan that accepts a low credit score, chances are you’ll receive a lower loan amount and higher interest rates than you’d get with a higher 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.