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Key takeaways
- Your credit score affects a lot of your life. What credit cards you’re approved for, if you can rent an apartment, qualify for a job, or easily open utility accounts.
- A bad credit score means you’ll have fewer loan or credit card options. The ones you are approved for will come with additional fees and a higher interest rate.
- Having a low credit score is expensive. You’ll pay more for loans, have to put down a security deposit to open utility accounts, and your car insurance premiums can go up.
Your credit score is super important. You may have found this out if you’ve tried applying for a credit card, getting a personal loan, or financing a car. With a good credit score, you can get credit cards with lots of perks, the best loans, and lower interest rates. A bad credit score (anything below 670) on the other hand, means you’ll have fewer credit cards or loans to choose from. If you do manage to get approved, you can expect to pay higher interest rates.
A low credit score can even make it hard to get an apartment, qualify for a job, or easily open utility accounts. The little ways this three-digit number can affect your life go on and on. Let’s go over the most common disadvantages of bad credit and how it can cost you money.
1. Fewer Credit Card Options
A high credit score means that you have a smorgasbord of credit card options with tantalizing rewards, low-interest rates, and other benefits. However, a low credit score significantly narrows down these choices and makes it difficult to get a card, let alone one with rewards. Most banks and financial institutions see you as a high-risk customer. So if they do approve you, they’ll likely tack on fees and a high APR.
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2. Pay More for a Loan
Whether you’re considering a personal, business, or student loan, a bad credit score can be a stumbling block. Lenders see your low score as a sign that you won’t pay back your loan. Consequently, if they do approve your loan, it’s likely to come with a higher interest rate and less generous terms. Over time, this can mean paying back significantly more than someone with a good credit score.
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3. Insurance Premiums Go Up
It might come as a surprise, but insurance companies often use credit scores to set premium rates. This is especially true for auto and homeowners insurance. A low credit score might suggest to them that you’re at a higher risk of making a claim, leading to increased premiums.
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4. Unsuccessful Job Applications
In many states, employers can review your credit report when deciding who to hire or promote. They often do this for financial jobs. A low credit score can be perceived as an indication of poor financial management or mark you as unreliable, potentially leading to missed job opportunities.
5. More Expensive Car Loans
When you’re in the market for a new car, your credit score can significantly influence your financing options. Those with lower scores often face higher interest rates, which can add thousands of dollars to the total cost of the vehicle over the life of the loan.
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6. Security Deposits for Utilities
Utility companies take your credit report, in particular your payment history into account. They might ask for a security deposit if your credit score is low and waive it only if you have a good credit score. This is their way of protecting themselves should you default on payments. But it makes it harder to get basic water, electricity, and even internet if you have poor credit.
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7. Harder Time Renting an Apartment
Landlords and property managers often run credit checks on potential tenants. Many require a credit score of 620 or higher while others are stricter and want a score of at least 700. If your score falls below this range, you may be denied outright, have to get a cosigner, or be forced to pay a higher security deposit to be approved.
8. Higher Mortgage Rates
Dreaming of buying a home? A bad credit score can make this dream very expensive or even impossible. Just like with other loans, banks will either deny your mortgage application or offer you a loan at a much higher rate. Over the lifespan of a 30-year mortgage, this could equate to tens or even hundreds of thousands of dollars in additional interest.
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Final Thoughts
While a bad credit score can pose numerous challenges and cost you significant money in higher interest payments, it’s essential to remember that it’s not a permanent state. Pay your bills on time, reduce the amount of credit you use, and pay down your debt and you will see your credit score improve. If you need a further boost, consider getting a secured credit card or a credit builder loan to help raise your score. As you practice good credit habits, your score will improve and you will be able to get the credit cards, loans, and even the apartment that you want.
