The Side Effects of Bad Credit

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The Side Effects of Bad Credit

Bad credit may have a wide range of negative consequences. If you have a tendency of paying your bills beyond the due date, late fines are unlikely to be your only issue. Poor borrowing practices destroy your credit, making it far more difficult to get loans in the future. They might also make it difficult to get a telephone contract or even certain employment. Here are just a few of the conceivable outcomes.

Key Takeaways

  • Poor credit may make it difficult to get vehicle and house loans, as well as credit card accounts—you may need to begin with a secured credit card to improve your credit.
  • Even if you are given a loan, the interest rate will almost certainly be greater.
  • Auto, renter’s, and homeowner’s insurance costs higher for those with poor credit.
  • Employers may do a credit check on you before hiring you, particularly if you’re seeking for a managerial position or one that requires you to handle money.

Bad Credit Means Trouble Getting a Loan

It should come as no surprise that banks want to know how likely you are to repay them before making you a new loan. One of the key ways they do this is by ordering your credit score from companies like FICO and VantageScore. These credit-scoring algorithms evaluate your creditworthiness based on information in your credit reports, such as loan amounts and payment history.

A poor credit score might make it difficult to get a loan, mortgage, or credit card account. If you do qualify, you will almost certainly have to pay higher interest rates to compensate for your high degree of default risk. Many credit card companies, for example, need a credit score between “good” and “excellent,” which implies a FICO score of at least 670 and a VantageScore of 700 or higher.

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A FICO of at least 620 is required to purchase a house with a conventional loan. Borrowers with credit scores as low as 500 may occasionally qualify for an FHA mortgage, but you must put down at least 10% and pay mortgage insurance, which raises your total borrowing expenses.

If your credit is less than fantastic and you have a financial emergency, you may need to borrow money quickly to get through it. While credit issues make obtaining an emergency loan more difficult, you may still be able to access a range of emergency loan choices.


The minimal FICO score required to open several credit card accounts.

Fewer Renting Options

Home purchasers aren’t the only ones who have to be concerned about their credit history. It might also come back to bother you when seeking to rent. Landlords, like banks, prefer to assess your capacity to pay them on time before giving over the keys to a house. As a result, as part of the application process, they will normally request your credit report.

If you’ve made some borrowing mistakes in the past, finding a new location might be difficult. There are several workarounds for weak credit, such as getting a cosigner or offering to pay a greater security deposit, but it’s far simpler to walk in with a good score.

A healthy credit history might be just as important for older folks as it is for younger ones. Because Medicare does not often cover extended stays in a nursing home or assisted living facility, these facilities depend on private fees. They often do a credit check before admitting an application to ensure that they can pay the bill.

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Before borrowing money, you should constantly be aware of your credit score.

Higher Insurance Costs

When they build up a large credit card debt or fall behind on their mortgage, many customers don’t expect to pay higher vehicle insurance rates. And yet, this is precisely what some insurance companies do (although some states prohibit the practice).

If you’re wondering why that is, it’s because research has shown a link between bad credit ratings and the possibility of drivers filing a claim with their vehicle insurance company. The poorer your credit, the more likely you will be at blame in an accident. According to a 2019 survey by The Zebra, an insurance comparison website, drivers with low credit paid more than twice as much as those with excellent credit. 1

Other sorts of insurance may look at your credit records as well. Some renter’s and homeowner’s policies, for example, utilize a proprietary credit-scoring algorithm to set your premiums. While life insurance companies do not normally utilize credit scores in the underwriting process, if you have recently filed for bankruptcy, it may be more difficult to receive a policy or their best prices.

Paying a Deposit for Utilities

When seeking to get an account with a utility or an internet provider, bad credit is often an impediment. Customers with poor credit may be required to pay a deposit before joining up, which serves as protection if you fail to pay your payment.

Even getting service with a cellular company might be difficult if you don’t have a strong borrowing history. Some demand individuals with poor credit to utilize a prepaid plan or make a deposit. You may also have difficulty qualifying for the best discounts on more desirable phones.

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Difficulty Landing a Job

When you interview for a job, your prospective employer may want not just a list of references, but also authorization to conduct a credit check. Why? Companies want to know that the individual they’re recruiting can be trusted when making financial choices for particular tasks, such as management and finance positions.

According to a 2016 CareerBuilder poll, 72% of companies do a background check on every new hiring, and 29% conduct a credit check as part of the screening process. 2 Allowing your credit score to deteriorate may cost you more than just money in the form of pricey loans. It may also restrict your earning potential.

The Bottom Line

A bad credit history might have far-reaching repercussions than you would imagine. A poor credit history not only leads to higher interest rates and fewer loan possibilities, but it may also make it difficult to locate homes and get certain services. In certain circumstances, it might work against you during a job search. If you haven’t looked at your credit report in a while, now could be a good time to check in.

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