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One of the biggest misconceptions about credit scores is that they’re simply a way to get credit cards or loans. Some people believe that as long as they don’t want a credit card or to take out loans, there’s no need for a good credit score. The important question people should be asking is, “What happens if you have a bad credit score?”
Surveys show that many Americans don’t understand the consequences of a bad credit score. In one survey, 45 percent of respondents said they don’t need a good credit score because they don’t plan on taking on any loans or debt, and 33 percent said it’s not financially important. The same survey shows 43 percent of people have experienced the side effects of a bad score.
The reality is that a bad credit score makes life more difficult and can cost you quite a bit of money. As you continue reading, you’ll learn about the negative consequences for people with bad credit, as well as some tips to increase your credit score and get back on the right track.
Key Takeaways
There’s technically not a specific score that’s considered a “bad credit score”, but the FICO® scoring model classifies 580 to 669 as “fair” and 300 to 579 as “poor.” Depending on what you’re trying to do, even scores within the “fair” range may come with some negative side effects. For example, you typically need a score of at least 620 to qualify for a home loan.
As you’ll soon learn, although you may get approval for credit cards or loans with a bad credit score, it can cost you a lot more money than if you had a higher score. In addition to higher interest rates, many other aspects of life are more difficult when you have a low credit score.
Your credit score is a three-digit number that lets lenders know a bit about your finances, and a low score may indicate that you’re a high risk. Those with a low credit score may be more likely to make late payments or possibly default on their loan. If you have a bad credit score, many lenders may deny your loan application. This can affect getting the following:
A bad credit score not only makes it harder to purchase a home, but it may limit your ability to rent an apartment or house as well. Similar to lenders, landlords want to ensure that you’ll pay your rent on time before they enter into a lease agreement with you. When you’re looking to rent, you often have to fill out an application with your information so the landlord can run your credit report.
The credit bureau Experian® recommends having a FICO score of 670 when looking to rent. They may approve you with a lower score, but they might look closer at your financial situation to better assess the potential risk.
Insurance companies base insurance rates on various factors — one of them being risk. Many people don’t think their credit score has anything to do with their car insurance, but there are many insurance companies that take your score into consideration. According to Allstate, the only states where this isn’t allowed are California, Hawaii and Massachusetts.
To assess risk, insurance companies use an insurance score. The insurance score looks at your credit report information and insurance claim history. Much like your credit score, the insurance score looks at your:
If you’re fortunate enough to rent with a bad credit score, you then have to worry about the higher deposits when turning on utilities. Some of the utilities that may require a larger deposit include:
You may also have to pay a deposit when getting a cellphone plan.
As you start to add up these increased deposits for necessities like housing and utilities, you begin to see how a bad credit score costs you more money and limits your finances. One of the many benefits of a good credit score is that you often don’t need to pay a deposit when turning on your utilities.
Some jobs run a credit check as part of the application process, and your low score may disqualify you from getting the position. This isn’t for all jobs, but one survey found that 29 percent of employers run a credit check as part of their pre-employment screening. Much like the other scenarios on this list, this has to do with managing risk.
Many of the jobs and positions that do a credit check involve handling money. A low credit score can indicate that a person is irresponsible with money or has debt, which could potentially lead to theft. People with a low credit score may be great for the position and aren’t a risk, but employers are always looking for ways to minimize risk and losses.
As you now know, a low credit score indicates a higher risk. Lenders want to ensure there’s a high likelihood of a person paying back a loan, but that’s difficult if a person has a low credit score. To offset this risk, lenders charge higher interest rates. The Experian 2023 State of the Automotive Finance Market Report found that people with scores of 300 to 500 pay roughly nine to 14 percentage points more in auto loan interest. This can add up to thousands of dollars.
Credit cards also charge higher interest rates based on your credit score. The Bureau of Consumer Financial Protection reports that people with a credit score of 740 and above have an average APR of 16 to 18 percent. Those with scores below 669 pay 22 percent or more.
A low credit score costs you money, and it also limits your opportunities. Each time you pay higher deposits and higher interest rates, it takes away from your financial goals. New York Times best-selling author and financial educator Ramit Sethi recommends allocating 10 percent of your income toward your retirement and five to 10 percent to savings. This becomes much more difficult if you’re constantly paying more due to your credit score.
Many people have turned their credit situation around and have come back from poor credit scores. This process takes time, but as you set up healthy credit practices, you can improve your credit score and work toward your financial goals. Below, we have five simple tips to help you improve your credit score.
Negative marks on your credit report can decrease your credit score significantly. Some of the most common derogatory marks include missed payments, collections accounts and bankruptcies. Some of these may take seven to 10 years to fall off, but you may be able to negotiate some to have them removed earlier with methods like a pay-for-delete letter.
There are many ways to get out of debt, but one of the best ways is to start by paying down your high-interest debts first. High-interest debts are costing you more money over time, so paying them off gives you more money to pay down your other debts. You can also use the “snowball method,” which involves paying off your debts from the smallest to the largest one.
One of the most important factors in your credit score is your payment history. Making your monthly payments on time helps build a good credit history and builds your credit score. One simple way to do this is to set up automatic payments. If you have extra money to pay toward your debts, you can make additional payments.
Secured credit cards are a great option for those with no credit or bad credit. The majority of these credit cards don’t have a minimal credit score. These work by making a deposit at the financial institution, which becomes your credit limit. Banks do this because there’s virtually no risk because you’re borrowing your own money. As you make your payments, they are reported to the credit bureaus to help raise your credit score.
Sometimes, there are errors on your credit report that are causing you to have a low credit score. To find potential errors, you’ll need to review your credit report. You can then write a 609 dispute letter to try and have it removed from your credit report.
Improving your credit score can change your life for the better by saving you money and helping you reach your goals. If you feel overwhelmed, you can get help from credit professionals here at Lexington Law Firm.
At Lexington Law Firm, our credit repair assistance includes a breakdown of items on your credit report summary and credit score monitoring. We also address credit reporting errors on your behalf. To get started, sign up for your free credit assessment today.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
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