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What are the Potential Effects of Bad Credit?

March 25, 2022 by Daniel Azzoli

Personal look at loan contract.

It may be an obvious statement to say that having bad credit can have a potentially negative effect on your life. But it can do a lot more damage than you might have ever realized.

For starters, the most obvious problem that people who have bad credit might face is increased difficulty when it comes to qualifying for some personal loans. Often people with bad credit may be approved for loans with high interest rates and/or fees. These high costs can drain their bank account over time, making it harder for them to save money.

So, with these things in mind, if you want to avoid the issues that you might end up facing if you go through life with a poor credit score, you’ll likely want to do what you can to build your credit history.

Having said that, the first step in this process is understanding how a low credit score impacts your life. To help with this process, we’re going to go over what bad credit is, and then walk you through six potential consequences of having a low credit score.

What’s Bad Credit?

Your credit score is a three-digit number that financial institutions look at to determine your creditworthiness. It can also be used in certain other areas of your life for specific reasons, but we’ll touch on those later.

Your credit score ranges from 300 to 850 based on the FICO scoring model, which is the most commonly used model. Generally speaking, if your score is 670 or higher, you’re considered to have a prime credit score, which may ultimately impact your ability to qualify for some personal loans with lower interest rates[1].

Person look at a personal loan contract.

In general, if your score is below 670, you’ll have subprime credit which would be considered poor if it sinks below 580. While you might be able to qualify for certain personal loans with bad credit, your options will likely be more limited.

6 Bad Credit Effects

Now that you understand what bad credit scores are versus a good credit score and what it means to fall on different areas of the credit score spectrum, let’s take a look at some of the most common consequences of having a low credit score.

1. Personal Loan Rejection

Like we’ve already mentioned, the main issue you might face when you have poor credit history is that you could have a hard time qualifying for different types of loans.

While a financial institution is going to need to take on some risk when they lend money, they want to mitigate that risk as much as possible. Your credit score is one of the main bad credit indicators that they may look at to get an idea of what kind of borrower you’ve been in the past, and how responsible you’ll be when handling the loan that they’d be offering you. If they don’t think you’ll be able to make timely payments, or pay back your loan at all, they may deny your application.

2. High Interest Rates and/or Fees on Personal Loans

Another downside that bears repeating are the lower interest rates and/or fees that you may not have access to because of your credit history. Like we said, in some situations, financial institutions use your credit score to determine how risky of a borrower you are, and while they still might approve your application for a loan despite your subprime credit score, you may pay the price by being charged higher interest rates and/or fees.

In some cases, the more interest you’ll be charged, the more a loan is going to cost you in the long run, which can have all sorts of negative impacts on your financial profile and your life in general. Taking on debt can be a slippery slope, so you’ll want to always make sure you pay as little interest as possible and that you don’t get stuck in a sticky financial situation.

3. You May Need to Pay a Security Deposit for Your Utilities

Lenders aren’t the only organizations that need to assess the risk involved with providing you with a particular service. Another area where this might come into play is with your utilities.

Providers will often review your credit report to determine how reliable of a customer you may end up being. They could look at your history as a borrower, and specifically your history of making timely payments on your previous utility bills. If you’re carrying a bad credit score, they may see you as a risk and be less willing to work with you.

Water pipes in the basement of a house.

While you may still be able to get the services you need from a utilities provider even with a bad credit score, they might ask you to pay a security deposit. This can be the case even when you have a history of paying your utility bills on time. This deposit will generally need to be paid at the beginning of your term and can be a big financial hit to deal with if money is tight.

4. Difficulty Finding Housing

Another area where someone is going to want some evidence of your ability to make timely payments on your credit accounts is when it comes to finding housing. Generally speaking, a landlord won’t hesitate to request a copy of your credit score. This helps them get a better sense of your financial stability and will help them to weed out potential bad tenants. What they’re hoping to find is someone with a good credit score who has a strong history of making timely payments on bills and rent.

On the other end of the spectrum, they may see people who have bad credit as being unreliable and simply reject their application. If your application does get accepted despite your poor credit history, you may be required to get someone to co-sign your lease or pay a bigger security deposit.

5. Difficulty Finding Employment

Most people can relate to the amount of effort and stress that comes with job hunting. You need to work on your resume, shortlist job openings that interest you, get ready for interviews, and much more. But these aren’t the only things that should be getting your attention. While it won’t necessarily happen in every instance, there are times when a potential employer will take a look at your credit report just like they’ll review your resume.

Like we’ve mentioned, your report will give them an idea of what type of borrower you’ve been and how well you’ve been able to manage your debt and bills. They may want to see this information to help them decide whether or not you’re a good fit for the position you’re applying for, especially if the role requires you to deal with confidential information or money. They also may just want to get a general sense of how reliable you are. Alternatively, if they look at your credit report and see that you’ve had issues with paying your bills on time, it may not work out in your favor.

Person signing a personal loan contract.

This can be a hard situation to be in for people who have a bad credit score. The longer this situation drags on, the bigger the strain on your financial situation, which could ultimately lead your credit score to drop further if you’re forced to miss payments on any bills. As your credit score drops, it may be even more difficult to find work.

This can be a slippery slope to fall down, but the unfortunate truth is that it’s in the hands of the employer to decided whether or not to check your credit history, and this could ultimately limit your chances of employment.

One important step for you to take before an interview is to make sure you’re as prepared as possible, even if they haven’t checked your credit score. Make sure you put yourself in a position to confidently answer any questions that you may be asked. If they do check your credit score, you’ll want to have an explanation for why it went south. It may also be helpful to have positive references from previous employers on hand.

6. High Premiums on Insurance

One way that insurance companies will evaluate risk is to review your credit report. There are specific credit-based insurance scores that they’ll use to help calculate your rate. Generally speaking, the rate you’ll end up paying will be higher if you have a bad credit score versus a good credit score. Having said that, there are other factors that will help determine what your insurance premium will be, not just your score.

Final Thoughts

As this list of bad credit effects shows, your credit score can affect your life in all sorts of different ways. It can impact your ability to find employment, qualify for installment loans or other types of loans, find housing, and much more. When you have bad credit, all these things may be more of a challenge.

To avoid these issues, it’s important that you do what you can to impact your credit. This means paying all your bills on time, paying off debt, and more. If your credit score is making it harder for you to get what you need, review your finances and do your best to integrate positive financial habits!

 


[1] https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-is-a-good-credit-score/


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