Many people realize that bad credit can reduce their chances of be approved for a loan.
While that’s true, it doesn’t stop there. From not getting a mortgage to buy your dream home to paying higher auto insurance rates, bad credit makes life difficult.
Unfortunately, bad credit isn’t easy to fix. Improving a bad credit score takes time, depending on your current status. For example, if you have a late payment, it can remain on your credit report for up to seven years.
There are steps you can take to increase your credit score, such as using a secured credit card and working with a financial advisor. However, it’s better to keep your credit standing so you don’t have to struggle.
Here are seven reasons why you should avoid bad credit:
1. You become a financial risk
Before a lender approves you for a loan, they want to know if you are financially sound. After all, a loan is a form of debt that must be repaid. If a borrower doesn’t repay the loan, they default and the lender takes a hit. Because of this, lenders aren’t really racing to approve borrowers with bad credit.
Whether you’re trying to buy a car or a new house, a low score makes it hard to make those two things happen. Even if you do get approved for a loan, the lender will most likely charge a high interest rate.
2. Your credit card options are limited
Bad credit makes it difficult to get approved for a credit card. You may be thinking, “Good! Credit cards cause debt!” True enough. But the fastest way to improve your credit score is with a credit card.
Even if you can get approved for a card with bad credit, you most likely have a high interest rate. You’re also less likely to be approved for a rewards card. But there is good news: A secured credit card can help improve your score with minimal risk.
Unlike a regular credit card, a secured credit card usually requires a cash deposit. Before you are approved, you must deposit money, which is usually equal to the credit limit. For example, if you make a $1,000 deposit, your credit limit is $1,000. If you miss a payment, the credit card company will use the money from your deposit to cover the costs. This makes it unlikely, if not impossible, that you will run into debt.
3. Buying a house is difficult
When buying a home, there are three common loan options: VA, conventional, and FHA loans. VA loans are for veterans or active duty members only. Conventional loans usually require a credit score of 620, while an FHA loan requires a credit score of 580.
According to FICO, a bad credit score is between 300 and 579. If your score is in that range, it will be challenging to get approved for any of the above loans. With a larger down payment, you may have a better chance of being approved with a lower credit score, but there is no guarantee.
4. Even renting can be a challenge
Not only does a bad credit score make it difficult to get approved for a loan, but you also have fewer rental options. Landlords, like lenders, want to know if you can afford the monthly payments. That’s why they check your credit before approving your application.
If your credit score is low, your landlord may decline your application altogether. Alternatively, they may suggest that you find a co-signer who can be held legally responsible for any payments you miss.
5. You pay higher down payments for utilities and cell phone contracts
If you have bad credit, it can be difficult to set up some of your utilities. Some companies will even charge people with bad credit a large down payment. That way, if customers don’t pay the bill, the company can use the deposit for the balance.
A mobile plan can also be difficult to obtain with poor credit. Before approving a consumer for a new contract, mobile carriers usually look at their credit. The worse their creditworthiness, the greater the customer’s risk and the less likely they are to be approved for the contract.
6. You Have Higher Auto Insurance Rates
This may come as a surprise, but some insurance companies will charge higher auto insurance premiums for those with bad credit. Why? Because insurance companies link bad credit to the likelihood of someone filing a claim.
Bad credit increased, according to a study insurance rates by 61%.
7. You could miss the job of your dreams
When you apply for a new job, your most focus is on polishing your resume and getting your interview right. It turns out there’s something else you should be focusing on: your credit report.
In a 2018 report, the National Association of Background Screeners found that: 95% of companies perform some sort of background check on their potential employees. Sixteen percent of those companies conduct credit checks on all candidates, while a third conduct credit checks on at least some. If you are one of them, make sure your report matches your application.
You may be wondering why an employer would check your credit report. One reason is for security purposes. They want to confirm your identity, education and background. But there’s another reason: they want to see how financially responsible you are. For some particularly sensitive messages, they may even need to determine whether financial pressures leave you vulnerable to blackmail.
To prepare for this examination, make sure you know what’s on your credit report before applying for a job. This will enable you to resolve any discrepancies and be prepared to explain any problem areas you are trying to resolve.
While there are ways to fix bad credit, it’s preferable to avoid it in the first place. So use the credit you have wisely and well, and above all make sure that you pay your bills reliably. Paying on time and living within your means will give you the good credit you need to live your best life.