All the ways bad credit can make your life difficult
Anyone who has had bad credit knows that it can be very painful. Oh sure, that doesn’t seem to affect your day-to-day too much. But when it comes to buying a car or filling out a rental application, that crappy credit score is back to haunt you. Here are some cons of having bad credit and what you can do about it.
Your cable, phone and internet bills may be higher
If your credit isn’t good, don’t be surprised if your cable, internet, or cell phone bill comes with additional charges. We told you before: service providers are allowed to charge you more for having bad credit. It’s called “risk-based pricing,” and according to the FTC, it’s completely legal. the FTC reported:
When you apply for things like cable or satellite TV, mobile phone service, or Internet service, the company may look at your credit report. They may use information from your credit report to offer you less favorable terms, which means they may charge you more for the service than someone with a better credit history. This is called risk-based pricing. The law says it’s OK as long as the company lets you know by sending you a risk-based pricing notice.
By law, the company must send you a risk-based pricing notice. Sprint recently had issues for not sending it out after billing customers with low credit an additional $ 7.99 per month.
You’ll want to check your monthly bill, or even call your service provider, to see if you’re paying extra. Next, review your credit report (what you should do anyway) and see why your score is so low in the first place. If there are any errors, write the credit bureau letter disputing them. If that doesn’t work, there’s not much you can do to get rid of these charges, other than improving your credit.
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You will pay a higher insurance premium
Your insurance premiums can also be a bit higher with bad credit. Carriers in most states check your credit for a rate, the The National Association of Insurance Commissioners (NAIC) explains. Because your credit is not great, these companies see you as a risk. They’re afraid you won’t pay, so they hedge their bets by charging you more.
The NAIC says it’s actually your “credit-based insurance score” that these companies check. It’s more or less similar to your usual credit score, but they say it’s made up of fewer factors. Here’s what goes into your credit insurance score:
Payment history (40%): how well you have made payments on your unpaid debt in the past
Unpaid debt (30%) – How much debt you currently have
Length of credit history (15%) – How long have you had a line of credit
Continuing New Credit (10%) – If you’ve recently applied for new lines of credit
Credit mix (5%) – The types of credit you have (credit card, mortgage, car loans, etc.)
Unfortunately, if you want to improve this score, you will have to use the same methods to improve your usual score: keep debt balances low and pay your bills on time.
It will be difficult to apply for a mortgage
If your credit is really bad, you might have a hard time buying a home. It is difficult, but not impossible. Bankrate underlines that mortgage lenders are increasingly lenient with low scores, especially if applicants have proven to have paid their rent on time for a year. Federal Housing Administration loans could be another viable option. According to US News, you can get an FHA loan with a score as low as 580, assuming you have the cash for at least 3.5% of a down payment. In some cases, you might even get a loan with a credit score of 500, but expect to pay even more up front.
However, even if you can get a loan, your interest rate will be much higher than that of someone with good credit. To verify this FICO tool, which tells you the average mortgage interest rate, based on your credit rating. It also compares the total interest paid over the life of the mortgage. You can see how the rates vary by state, but in the screenshot below I’ve set it up for the national average. As you can see, a lower score will cost you tens of thousands over time:
Even half a percentage point can cost you almost $ 30,000 more in the long run, so you might want to consider improving your credit before taking out a loan. Of course, mortgage rates are very low right now, so you have to consider the market as well, but your credit score also plays a big role.
You will have higher interest on other loans
High interest rates aren’t limited to your mortgage. If you take out a car loan or personal loan, you can also expect higher than average rates.
If your credit is really bad, you will probably need to take out a subprime auto loan (if you have to take out a loan). A subprime loan is a special loan for borrowers with poor credit history — and according to Edmunds, your interest rate on a subprime loan could reach 18%, depending on the state.
Bankrate suggests trying to get a loan with a local box, which could be a little more lenient. They add that even your employer or insurance company can offer auto financing. They also suggest business loan terms, not just a monthly payment. You want to consider what you’re paying in total over time:
Look for the cheapest money – the lowest APR over the shortest period. Don’t get sidetracked by promises of a lower monthly payment over a longer period of time, Van Alst says. If the only way to make the payments is with a long-term loan, you probably can’t afford the car.
It should be noted that you should avoid dealer financing whenever possible, as the rates are generally higher.
The interest rates for credit cards have a fairly wide range. According to Investopediathey can range from 7 to 36 percent. If your credit rating is bad, you can probably expect a rate of 22% or more, says Investopedia.
Work on improve your score, and when you notice it’s a little higher, call your credit card company and follow this script for a better rate.
You might have difficulty renting an apartment
Renting an apartment can be a big deal if your credit isn’t good. Again, you are seen as a risk and the owner or rental company wants to make sure you can pay on time each month. Fortunately, there are a few things you can do to improve your chances of getting the apartment you want. We have detailed these methods here, but a few options include:
- Provide a brief explanation: Add a statement to your credit report explaining all negative items.
- Request a recommendation: If you are up to date with your payments, ask previous owners for a letter of recommendation stating so.
- Offer an incentive: Offer to move in immediately, pay a larger security deposit, sign a short-term lease or direct deposit from your bank.
Sure, co-signing is also an option, but not to be taken lightly. You may also want to consider looking for smaller, independent owners who might be willing to work with you.
When it comes time to turn on your water or electricity, the utility company may ask you to pay a security deposit if you have bad credit. If so, make sure you understand what happens to that money when you move. In most cases, you’ll just get it back when you move out, but you want to make sure that’s the case.
You might not get the job you wanted
Although an employer does not check your credit score, they are legally allowed to review your credit report with written approval. Your credit score and your credit history are different. If your credit history is bad, both will reflect that, but your score is a number and your report details your past.
However, this usually only matters if you are applying for a job that requires financial skills (like a loan officer or bank teller) or a job in the government. In addition, some states regulate employers’ access to this information. Credit.com Reports:
This may seem unfair given that bad credit can result from medical bills, layoffs and other factors out of control, however, there are many ways to rebuild your credit and some states have enacted laws that restrict the use of credit information in the hiring process. This is the case in California, Connecticut, Hawaii, Illinois, Maryland, Oregon and Washington, according to the National Conference of State Legislatures.
To protect yourself, check your credit report for any errors or negative items. Then discuss these areas with the hiring manager and tell them what steps you are taking to repair your credit.
Really, this is the solution to it all: improving your credit. Get a free copy of your report, examine it carefully, then implement some strategies to increase your score. Either way, it helps to just be aware of each of these drawbacks so that you are prepared when the problem arises. While there are workarounds to each of these issues, correcting your score is the best long-term solution.
Image by Tina Mailhot-Roberge.