5 Ways a Bad Credit Score Affects You
Having a bad credit score is a recipe for disaster. Most people don’t consider the potential long-term ramifications of their current financial situation. Your credit score affects more than just your ability to take out personal loans or new lines of credit. Many businesses are now considering an individual’s credit history before they enter into any business agreement or sales with that individual. This includes banks, home utility companies, insurance companies, and more. If that’s not enough to convince you to make some improvements, then here’s five ways a bad credit score affects you.
Renting/Buying a Home
This one should be obvious. Almost everyone wants to buy a home at some point, and a bad credit score can significantly impede your ability to do so. Purchasing a home is a massive investment, so you’ll want to be sure you’re getting the lowest interest rates possible. Demonstrating smart financial decision-making via a good credit score shows lenders that you’re capable of making timely payments, so they don’t feel like they’re taking a risk on you. To put it simply: the better your credit score is, the less of a risk you are to lenders. The lower the risk, the lower the interest rate.
Even if you’re not interested in home ownership, your credit score will still affect your ability to get approved to rent a home or apartment. Similar to how lenders will want to see that you’re capable of making smart financial decisions, landlords will want to do the same. In fact, most landlords don’t have the same protections that banks and lenders have, so they owe it to themselves to check your credit history before allowing you to move in. Renting rarely requires your credit score to be as high as it needs to be when you’re buying a home, but you should be taking the necessary steps to improve your credit score and ensure that you’ll always have a roof over your head.
Cell Phone Contracts
In the digital age, it’s unreasonable for many people to live without a cell phone. Not having one can hinder your ability to get or hold a job and stay connected to the people around you. Most cell phone companies will run a credit check before signing you up for a contract. Their reasoning is similar to landlords and banks in that they want to see that you’re able to make timely payments. Carriers may require a significant down payment or deny you a contract if you have a poor credit score.
If your credit score is low, you can opt to a month-to-month or prepaid plan, however these plans typically don’t include the cost of a new phone within the monthly payment. That means you must purchase a phone upfront, which can cost you a ton of money (although it could save you money in the long run).
Choose Your Lenders/Negotiate Rates
As previously mentioned, higher credit scores typically result in lower interest rates, because lenders won’t see you as a risk, and they’ll want your business. Them wanting your business could work to your advantage, because it gives you the power to negotiate interest rates with lenders and allows you to shop around to find the packages and interest rates that are best for you. Also, apartment complexes, homes for rent, insurance companies, and many companies that offer home utilities (such as internet and electricity) will not require down payments if they see that your credit history is in good standing.
When you have a poor credit score, it puts you in a ‘take what you can get’ situation, since lenders aren’t going to feel the need to fight for your business, and interest rates will be consistently high across the board. All this is under the assumption that you’re even able to receive any offers. Additionally, you’ll likely have to make down payments on most large purchases that include monthly payments. Improving your credit score will save you money in the long run, based on these factors.
Car Insurance Rates
FICO analyzes information about your financial history to predict consumer behavior to help lenders determine whether an individual can take on a new line of credit. The same company offers a credit-based insurance score that is used by many car insurance companies to determine your insurance rates. Having a poor credit score almost always means an increase in car insurance rates and down payments for coverage.
NOTE: There are many other factors that insurance companies use to determine your rates including where you live, marital status, the model of your car, your driving record, your annual income, etc. Also, your credit score can affect the rates of your homeowner’s insurance, life insurance, and more.
Getting A Job
It has become increasingly common for employers around the country to use an individual’s credit history to determine their eligibility for a job or promotion. Some employers believe that an individual’s credit score can be used to ascertain that person’s ability to act responsibly. This practice is controversial, because there are many instances where an individual’s poor credit score came as a result of something that was out of their control. Nonetheless, it’s a significant factor to consider if you have a subpar credit score. The last thing you’d want is to find yourself in a situation where you can’t get the promotion or job you worked hard for because of your credit history. Taking the necessary steps to get your credit score in good standing means that you won’t need to worry about your ability to get and hold on to a good job.
Getting Your Credit Score to Where It Needs to Be
Your credit score can affect your ability to do many of the important things in life, including buying a home and getting a good job. If you think your credit score may be too low, here are some things you need to do:
Find Out What Your Current Credit Score Is
Before you can start improving your credit, you need to know its current status. Credit scores range from 300 to 850 points. A higher score means you have a better credit history and can access loans with lower interest rates. A credit score above 750 is generally what you need to access the lowest interest rates and get approved for most loans. If your score is below 600, you need to make some changes, and you need to start soon.
Stick to Your Credit Limits
Getting too close to your credit limit will damage your credit score. You should aim to keep your credit utilization below 30%. This means if you have a $1000 credit limit, you don’t want to let the balance exceed $300. After several years of on-time payments and staying well within your credit limit, most credit card companies will increase your limit. When a credit card provider boosts your credit limit, your credit score improves.
Apply for Credit-Building Accounts
If your score is low, you should get a secured card. This is a type of credit card that requires you to deposit some funds to access credit. It is not, however, simply a debit card. When you use it, you use credit; nothing comes out of the deposit you put down. Making on-time monthly payments will help to improve your credit score as secured card providers submit your account status to credit reporting agencies. When you have improved your credit and are done with the card, you get your deposit back.
Apply for a Locked Savings Loan
Another option is to take out a credit union loan from a provider that deposits the funds in a locked savings account. Once the loan term is up, providing you kept up with the payments, you will be able to access the money in the savings account, and the settled account will greatly help to build your credit.
Don’t Rush It
Limit your applications for new credit cards and loans to ensure you keep up with payment on the accounts for at least half a year. Too many applications for credit products can negatively impact your credit score, as can the total amount of debt you take on. If you struggle to remember when payments are due for your existing debts, it would be foolish to apply for more credit.
While your credit score might be really bad at the moment, there are plenty of things you can do to start rebuilding it. Once you restore your credit score, you will find it easier to reserve a hotel room, obtain a home mortgage, access car financing, rent an apartment, and even get a better paying job.
Consumers often think that their credit score is only impacted by borrowing money. For example, when you apply for a loan, the lender will conduct a credit inquiry. Most credit inquiries will drop your credit rating by a few points. Furthermore, if you fail to repay a loan on time – or you get unpaid debt discharged in a bankruptcy court – your credit rating will drop a lot. However, many consumers don’t realize that there are several things unrelated to taking out or repaying a loan that can hurt their credit score.
1. Requesting a Credit Card Limit Increase
One of the most frustrating things that can hurt your credit score is requesting an increase to your credit limit. You work hard to be responsible with your credit card debt. You never miss payments. Furthermore, you might even be one of those people who pays off their credit card in full each month. However, if you request a credit limit increase, many financial service companies will conduct a hard credit inquiry – which will lower your credit score. That’s why before you request an increase, you need to ask your financial service company whether doing so will hurt your credit rating.
2. Business Credit Cards
Small business owners often take out business credit cards to pay for many of their company’s expenses. However, taking out a company charge card can hurt your credit rating – because the financial service company will check your credit. Furthermore, even though most business owners are protected from personal bankruptcy should their firm go under, many could still be on the hook for credit card debt on their company charge card. Therefore, you need to make sure that you cover anything that you charge on your business credit card.
3. Unpaid Parking Fines
It can be tempting to forget about a parking ticket – letting it go unpaid. Even if you get away with not paying a parking fine, the unpaid ticket might catch up to your credit score. Many local governments are starting to report unpaid fines to credit reporting agencies. Therefore, if you get a parking ticket and you can’t get it dismissed, pay the fine!
4. Leasing a Car
Most consumers realize that if they apply for an auto loan, the lender will check their credit rating – which could knock a few points off their credit score. However, many people don’t realize that leasing a car will impact your credit rating as well. That’s because the auto dealer wants to make sure that you will make your lease payments on time. Therefore, they will (likely) conduct a full credit check on you. Furthermore, if you fail to make the lease payments on time, your credit rating will take a huge hit.
5. Co-Signing a Loan
Parents often help their kids borrow money by co-signing loans. Even though you aren’t the one using the loan, you are still on the hook to make sure it gets repaid. Therefore, if you co-sign a loan for someone else, the lender will want to know your credit history. As you know by now, most credit checks will knock (at least) a few points off your rating. Furthermore, as a co-signer, you are also responsible to make sure that the loan payments are made on time. That means if the primary borrower misses loan payments, your credit rating will take another hit.
6. Taking Out a New Insurance Policy
Whenever you apply for a new insurance policy, the insurer will want to determine the level of risk to insure you, as well as whether you will pay your premium. That means most insurance companies – auto, home, life, and health – will conduct a credit check on you. Therefore, your credit rating will (likely) decline when you take out new insurance policies. Depending on where you live, certain states require that insurance companies inform applicants that they will conduct a credit check on them.
7. Overdue Library Books
Many people would probably admit that they have forgotten to return a library book at some point in their life. No big deal, right? Wrong! Even though an overdue library book might seem like a small thing, failing to pay the fines associated with it can take a huge bite out of your credit rating. That’s because a growing number of libraries are now reporting unpaid library fines to the credit reporting bureaus. Therefore, if you fail to pay for an overdue library book, the unpaid fine could show up on your credit report.
8. Unpaid Medical Bills
If you haven’t not paid any bills, then these debts could be sold to a collection agency, your credit rating has likely already taken a hit. If you do succeed at getting your medical debt discharged in bankruptcy court, the court won’t be able to protect your credit rating. Even though debts incurred for medical reasons is one of the most common reasons for bankruptcy in America, the credit reporting bureaus will penalize your rating for at least a few years.
9. Cell Phone Plans
You might not think that getting a new cell phone or changing carriers would hurt your credit rating. However, there are two scenarios when a cellular company will run a credit check on you. First, if you sign up for what’s called a postpaid plan – that’s when you are billed monthly for your plan – the cellular company will want to check your credit to make sure that you will pay your bill on time. Secondly, if you pay for a new phone with a payment plan, your cellular provider will want to make sure that you are going to pay for your phone.
10. Breaking a Lease
There are many reasons why tenants decide to break a lease. For example, you might have to move to another city. You might decide that you can’t afford your current rental and need something less expensive. Most leases have a clause that will let you break them. However, you will likely have to pay a penalty. If you fail to pay penalty for breaking a lease, you guessed it, the rental company can turn you over to a collection agency. Once your account is past due and goes to a collection agency, your credit rating will start dropping.
In short, you must start thinking about how all of your financial transactions can hurt your credit score. Many things that you wouldn’t consider negative – like requesting a credit card rate increase, leasing a car, applying for a new insurance policy – can all hurt your score. Furthermore, unpaid bills and fines can hurt your credit rating as well. Before you agree to co-sign a loan, make sure that the primary borrower is responsible and will fully repay the loan on time. Otherwise, you and your credit rating could be on the line.
How Credit Counseling Can Help in Times of Crisis
Many individuals put off asking for help during financially challenging times because of embarrassment. Additionally, they don’t want to become victims of scams. However, many others have experienced or are experiencing the same difficulties, and you can learn how to avoid scammers. Credit counseling makes an excellent tool, but where do you find it, and how can it help?
How to Find Help
Since credit counseling is offered by many non-profit organizations, you should never pay to initiate help. Ask financial institutions for referrals, or inquire at local consumer protection groups. You can also contact the National Foundation for Credit Counseling local in your state. Upon request, any reputable service related to this industry will send free information about the programs it provides.
How to Prepare
To get the best advice, have all financial documentation on hand. In addition to debt and monthly expense records, include those for assets and income. Make sure to set aside about 90 minutes for the phone call during a time span away from family obligations.
What to Expect
Upon selection of a particular organization, you will conduct a phone interview with a designated counselor. The exact length of this session will depend on individual circumstances. At the least this person should offer several free services, including assessment of credit reports, advice on how to improve finances, help for budgeting, and referrals for additional resources.
Questions You Should Ask
Before signing up for services, you have a right to find out about the organization and workers. This information especially applies when you want to hire them for paid services going forward. You should know about the workers’ accreditation, how they are trained, and whether they have affiliations with outside companies.
The Debt Management Plan
It’s possible that a counselor might suggest enrollment in a debt management plan. Often referred to as a DMP, this program can help eliminate debt but usually functions as a last resort. Under this plan, the agency works out a payment schedule with creditors. Clients send deposits to the agency, and it will pay the debts monthly.
A DMP works well for people who have trouble managing debts. Since this program has a setup charge and monthly fees, it’s not for everyone. However, sometimes counselors wave fees when extenuating circumstances exist.
Regardless of your individual situation, credit counseling can help with many financial issues. When you use these tips, you will be assured to get the best aid possible.