Money makes the world go round – that saying wasn’t coined without good reason. A person’s credit and financial history have a massive impact on their lives, affecting everything from renting vehicles to purchasing homes. Good credit is extremely important when it comes to establishing financial credibility and getting qualified for loans, installment plans, and other types of payment programs in order to make purchases. Establishing good credit starts with responsible spending; specifically paying bills on time and living within realistic means.
What Exactly is Bad Credit?
Bad credit is a combination of factors that indicates a higher risk for certain persons. Bad credit may be the result of borrowing too much money, not being able to make payments on time, or other similar factors. It is indicated by a low credit score and warns creditors and other institutions that the person is prone to missing payments or defaulting on payment plans entirely. FICO scores generally range between 300 and 850; while VantageScore ranks people between 501 and 990 points. Lower credit scores indicate bad credit rates and can drastically increase the amount of interest on a no credit check installment loan or insurance, and the ability to get approved for loans or credit. Many mortgages require a minimum credit score of 620, so people with a poor credit rating could potentially face problems when considering purchasing a house. These scores are based on two main factors: amount of available credit and the timeliness of payments. Available credit refers to the unused portion of an open line of credit like a credit card, home equity line, or other type of loan. A higher amount of available credit is a positive indicator when determining credit scores.
The Disadvantages of Bad Credit:
You may already know bad credit comes with extra charges attached to routine purchases, and may also result in the denial of extending an open line of credit or mortgage. Here are some of the disadvantages of having a poor credit rating:
- Getting Charged Extra for Bad Credit:
If you have poor credit, you are more likely to be charged extra when making purchases or renting items or property. Higher interest rates on loans, credit cards, and insurance lead to an increased drain on your financial resources. Getting approved for any of these services requires a credit check; and if your credit isn’t up to the required standard, you could see an interest rate of 20 percent or more. When you need money fast with bad credit it may be impossible to obtain an open line of credit or get a loan with bad credit.
Additionally, hefty security deposits may be required when getting an apartment or obtaining utilities. Phone contracts can also become more expensive as most providers do not extend the benefits of pay as you go plans for people with a bad credit history. In the long run, people with poor credit are often charged more – and expected to pay up – despite having less in savings and generally making lower wages.
- Expensive Insurance:
Insurance companies maintain their own credit scores that are used to determine the interest rate each new or existing client must pay in order to maintain coverage. A poor credit rating that indicates a lower likelihood of paying insurance fees on time means a hike in the interest rate – in other words, you will pay more for the same service that a person with good credit can get for less. While the use of credit scores does vary from state to state, most companies do offer rewards for good credit in the form of discounts; and if you have a bad credit score, you just may end up paying too much for your insurance.
- Mortgage and Property:
When looking at mortgages or home loans, people with bad credit are likely to get hit with increased finance charges that may increase the amount they pay over a 30 year period by $100,000. Additionally, homeowners insurance also uses credit based information to determine premiums, and that may also go up if you have bad credit.
- Student Loans and Job Prospects:
If you are one of the millions of Americans with a student loan you should be aware that bad credit may result in your loan interest rates soaring into double digits. What’s more, nearly half of all employers in the US carry out credit checks on applicants; and if your credit history isn’t all that great, it may end up costing you your dream job. Additionally, state and federal workers are also required to maintain good credit for certain government clearances that are essential for various jobs.
- Stress, Health Issues and Life at Home:
Most people do not take bad credit seriously until it’s too late. Poor credit scores over a long period of time may result in facing denied payments and extensions leading to a tremendous amount of stress. This stress in turn can adversely affect mental and physical health, lead to family problems, and issues at work. 75 percent of women and over half of all men indicate credit scores will affect their dating decisions; pointing to the importance of money managing skills for your family.
What You Can do to Fix Bad Credit:
If you need a loan with bad credit or are interested in getting a credit card, mortgage, or insurance at the right premium, you should follow the steps outlined below:
- Don’t Wait Around:
Bad credit is somewhat similar to a snowball that gets larger as it rolls downhill. Don’t wait to repair your credit, or you could face a huge amount of issues down the road.
- Use Automatic Payment Reminders:
Set up automatic payment reminders to pay your bills on time and establish a reasonable history of keeping up with the payments you owe.
- Get Rid of the Plastic:
Credit cards, rack up the largest and most expensive amount of debt. While we do not recommend outright cancelling your credit card, you should avoid using it and instead switch to a debit card or cash for some time.