The True Cost of Bad Credit

By Steven Shaw on 5/6/2014

Credit 101

The True Cost of Bad Credit

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Life’s easier if you have good credit, financially speaking. It can be challenging to get to that point, but aiming for great credit is a worthwhile goal, considering how costly it can be to have bad credit.

You could have poor credit for a variety of reasons, and if you look at your credit score and credit reports, you’ll probably be able to figure out why. Perhaps you have trouble making loan payments on time, or your credit card balances add up to more than 30% of your limit — poor credit could also be the result of having a very short credit history. No matter the reason, having bad credit means your history (or lack of history) makes you seem like a risky borrower to a potential lender.

If you have bad credit, you’ll want to work to improve it. Otherwise, you can face some obstacles.

It’s Hard to Get Loans

The lower your credit score, the less likely you are to be approved for loans and credit cards. If you’re approved, your poor credit standing often results in higher interest rates on the loan.

Credit reports and credit scores aren’t the only factors in loan-application decisions, but you want them to be an asset, not a liability. There are hundreds of credit scoring models out there, and you’ll never know which ones your potential lenders will use in their decision-making processes, so it helps to focus on the fundamentals (paying on time, using credit conservatively, etc.).

You Pay More

Having poor credit is costly. Yes, high interest rates will force you to pay more than someone with great credit who is borrowing the same amount of money, but non-credit industries also consult consumer reports and scores when pricing their products.

For example: When you set up your utilities or get renter’s or car insurance, your credit standing may play a role in determining how much you pay. If you don’t meet certain credit standards of your electricity provider, you may have to pay a deposit when you have services turned on. Utility companies do this because statistically, people with poor credit are more likely to fall behind on or fail to pay bills. By asking for more money upfront, they protect themselves from loss.

Your landlord will probably pull your credit when you apply for an apartment, too, because he or she wants to know if you’re likely to pay the rent on time. Again, you may be required to pay a higher deposit because of poor credit.

Potential employers can also pull your credit reports, though you have to give them permission to do so. Certain states restrict the use of credit reports in the hiring process, so check to see what your state allows.

Even if you’re not planning on taking out loans, you should stay on top of your credit standing by regularly reviewing your credit reports and scores. Failing to check them means you may not find out about errors on your credit report until they’ve adversely affected you, and it’s best to address mistakes before they cause bigger problems. You’re entitled to a free annual credit report from each of the major credit bureaus, and you can get two of your credit scores for free with a account.

More on Credit Reports and Credit Scores:

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