More than half of all Americans have subprime credit. Unfortunately, this means that most people don’t have access to the best interest rates and loan terms available when they apply for a credit card or loan.
Having bad credit can have a significant impact on your life, regardless of whether you use credit every day or pay cash for most of your purchases.
Bad credit doesn’t affect just your loans. It branches out to many other areas that might surprise you. Find out exactly how much bad credit can cost you and what you can do to turn things around.
Understanding Credit Scores
Your credit score is a three-digit number derived from your credit history. It tells lenders how risky it is to lend you money or extend credit to you. FICO scores range from 300 to 850, and where your score lies in this spectrum can dramatically affect your financial life.
FICO scores are generally categorized as excellent, good, fair, poor, or bad. Having a low credit score or bad credit can limit your financial opportunities and make borrowing money more expensive. Regularly monitoring your FICO score is a good practice to ensure you maintain accurate information and understand your current credit standing.
Direct Financial Costs of Bad Credit
Having a bad credit score can have substantial financial consequences. Here’s a breakdown of how bad credit can take a toll on your financial health:
Inflated Interest Rates on Loans and Credit Cards
Bad credit may not entirely preclude you from loans or credit cards, but it does come at a steep price. Individuals with lower credit scores are often subjected to much higher interest rates than those with better scores. To put it in perspective, the interest rate on a personal loan or car loan could be two or even three times higher for someone with bad credit.
These inflated rates can accumulate substantially over time, particularly with larger loans like mortgages. Over the loan term, the total interest paid could be thousands more with bad credit scores.
The Risks of Payday Loans & Title Loans
Payday and title loans may seem tempting but come with their own set of dangers. They are characterized by extraordinarily high interest rates and fees. Additionally, if you fail to repay the loan on time, you risk losing your car or other property.
The Student Loan Crisis
Student loans pose a significant burden for many. As it stands, over 40% of student loan borrowers aren’t making payments, with 16% already in default. Missed payments and defaulting can further damage your credit.
If you already carry bad credit and seek a solution to reduce your monthly payments, your options may be limited, and qualifying for a lower rate or refinancing might be out of reach. It’s a daunting cycle, but the solution lies in improving your credit.
Higher Insurance Premiums
Your credit score doesn’t just impact loans, but also your insurance premiums. Many insurance providers use credit-based insurance scores to determine premiums. As a result, those with poor credit often face higher premiums, especially in areas like auto and home insurance.
Challenges in Renting an Apartment
Your credit score can also impact your housing options. An increasing number of landlords now incorporate credit checks in their tenant screening process. In a competitive housing market, a bad credit score can become a significant hindrance in renting an apartment.
Securing a mortgage is particularly challenging for those with bad credit. Even with approval, you’re likely to be hit with higher interest rates, costing you a considerable sum over the mortgage’s lifespan. Moreover, your credit score dictates the size of the down payment you’ll need to make.
Consider this FHA loan example: Sarah and Brad both aim to purchase a $175,000 home with an FHA loan. Sarah, boasting a credit score of 745, secures a 3.45% interest rate and a 3.5% down payment, leading to a total payment of $271,303 over the 30-year mortgage.
Brad, however, struggles with a low credit score of 575. He’s required to make a 10% down payment and faces a 5.25% interest rate. Despite a higher down payment, his monthly payments are higher, leading to a total payment of $313,099 over the life of the mortgage. Brad ends up paying over $53,000 more than Sarah for the same property, purely because of his bad credit.
Indirect Costs of Bad Credit
In addition to the direct financial implications, bad credit can also inflict several indirect costs:
Limited Job Opportunities
Your credit score may play an unexpected role in your career prospects. Certain employers incorporate credit checks into their hiring process, particularly for positions associated with financial responsibilities or company credit cards. Consequently, a tarnished credit history might restrict your job opportunities and negatively impact your income potential.
While it’s challenging to quantify the exact cost of bad credit in this context, it’s clear that your earnings could be affected if your credit prevents career advancement.
Restricted Access to Bank Accounts
Maintaining a bank account can become challenging with a bad credit score. Banks are often reluctant to provide accounts to individuals with bad credit, especially those with a history of recurrent overdrafts or bounced checks.
Difficulty Starting a Business
Starting a business usually entails borrowing funds. However, if your credit score is low, obtaining business loans can be a daunting task. Your personal credit can exert a direct influence on your business operations, and a bad score can limit your entrepreneurial endeavors.
Emotional and Psychological Strains
The repercussions of bad credit extend beyond finances, potentially causing emotional and psychological stress. The burden of managing debt, meeting high minimum payments, and navigating limited credit access can strain your emotional health and personal relationships over time. The persistent worry and stress associated with bad credit can be a significant, albeit intangible, cost.
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How Bad Decisions Affect Your Credit
Now you know how bad credit impacts your life, from financial opportunities to potential earning power. It’s time to find out how much a bad financial decision can affect your credit. Hopefully, the next time you consider one of these options, you’ll look for an alternative so that your credit score doesn’t take a hit.
|Financial Decision||Credit Score Drop with a 680 Starting Score||Credit Score Drop with a 780 Starting Score|
|Maxed-out credit card||10 – 30 points||25 – 45 points|
|30-day late payment||60 – 80 points||90 – 110 points|
|Debt settlement||45 – 65 points||105 – 125 points|
|Foreclosure||85 – 105 points||140 – 165 points|
|Bankruptcy||130 – 150 points||220 – 240 points|
How to Clean Up Your Credit
So, what’s the best way you can clean up your credit history and raise your credit score? The answer to that question depends on what exactly is on your credit report.
Grab Copies of Your Credit Reports
First, request a copy of your three credit reports from Experian, Equifax, and TransUnion. It’s free every 12 months, and it’s definitely a service worth taking advantage of. If you fill out your request online, you can download your reports right then.
Check Your Reports for Inaccuracies
Once you have your reports, thoroughly review all the information. This includes your personal information, account status, credit limits, loan amounts, payment histories, and any negative items such as late payments, collections, or bankruptcies.
If your report contains any negative items, you may be able to remove them on your own. The method to do this depends on the nature of the negative items:
- Incorrect Information: If you spot errors or inaccuracies on your credit report, file a dispute with the relevant credit bureau. The credit bureaus are legally obliged to investigate and correct any inaccuracies, usually within 30 days.
- Outdated Negative Information: Negative items should automatically be removed from your credit report after a certain period, typically seven years. If such items linger beyond this period, you can request their removal.
- Negotiate with Creditors: If the negative items are accurate but due to circumstances such as financial hardship, you can negotiate with your creditors. They may agree to remove the negative item in exchange for payment, a practice known as “pay for delete.”
Hire a Credit Repair Service
If your credit needs a lot of work, you might also want to consider hiring a credit repair service. They understand how the law works. They also ensure that no stone is left unturned when it comes to fixing your credit.
When you work with an experienced company, you’ll receive a personalized action plan tailored specifically to your credit situation.
Most major credit repair companies have teams of experts and lawyers who understand the Fair Credit Reporting Act and other consumer protection laws. Follow this link to read the review of our top-ranked company.
How to Improve Your Credit Score
Improving your credit score is not an overnight process, but with consistent effort, you can gradually increase your score. Here’s how:
Importance of Payment History
Your payment history is the most significant factor affecting your credit. Making on-time payments is key to improving your credit and moving from bad credit to good credit.
Reducing the Amount of Debt
The amount of debt you owe, also known as your credit utilization ratio, significantly impacts your credit. Paying down your debt, especially on credit cards, can help improve your score.
Limiting New Credit Inquiries
Every time you apply for a new credit product, a hard inquiry is made on your credit report, which can lower your credit score. Limiting new credit inquiries can prevent your score from dropping further.
Increasing Credit Age
The length of your credit history also plays a role in building positive credit history. Keeping your oldest credit accounts open, even if they have a zero balance, can increase your credit age and potentially boost your score.
Maintaining a Diverse Credit Mix
Having a mix of different types of credit — such as credit cards, auto loans, and home loans — can positively influence your credit. Lenders like to see that you can handle different types of credit responsibly.
Bad credit can cost you in many ways, from higher interest rates to limited opportunities. It’s essential to understand these costs and work towards better credit. By making on time payments, reducing your debt, limiting new credit inquiries, increasing your credit age, and maintaining a diverse credit mix, you can build and maintain a good credit score.
Remember, credit scores are not static; they change as new information is added to your credit report. With dedication and a solid plan, you can move from a lower credit score to a higher one, unlocking more financial opportunities and saving money in the long run.