Low credit score can affect your life in many different ways. A low credit score can hinder your ability to make certain purchases, since it is one of the most important factors that banks and other lenders utilize to assess your financial responsibility and ability to pay. When you have a low credit score, it is a strong indicator that you are a riskier borrower.
Here are some other ways that bad credit impacts your finances and keep you in a cycle of poverty.
Not Getting Approved for a Loan
Low credit score can hinder the possibility of getting approved for a new loan or any other credit application. According to Experian, the lender’s primary objective is to determine whether your credit history is good or bad. To a lender, having a low credit score is a strong indicator that you will default on your loan obligation.
Difficulty in Buying a Home
Bad credit rating affects your ability to get a mortgage approval, because the mortgage lender may deny you a loan or if the decision is made to extend credit, the interest rate will be high and you will likely be required to have a higher down payment. For example, when you have a low credit score, you may be required to make a down payment of 15% and receive an interest rate of 5% on a $200,000 home, whereas a less risky borrower may be allowed to make a down payment of 5% or even less, and receive an interest rate of 3% on the same home. Use the following calculator to determine how much you would pay for a home loan over its lifetime based on different interest rates.
Paying Security Deposits on Utilities
Utility companies will check your credit as part of the application process. It is not uncommon for them to require you to pay a security deposit if you have a low credit score.
Difficulty in Getting a Cell Phone Contract
Major cell phone companies will check your credit score when you sign up for service because cell phone companies pay close attention to their prospective customer’s credit score. If you have bad credit, you may have to make a hefty down payment, or settle for a prepaid cell phone with month-to-month contract that has proven to be more expensive.
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Paying High Insurance Premiums
Your low credit score also has a negative impact on your insurance rates. Before approving you for insurance and determining your insurance rate, insurance companies will review your credit history. For example, United Policyholders reported that “Individuals in both Illinois and Missouri with bad credit pay on average, in excess of $700 more annually for auto insurance.” Use the following calculator to determine how much you would pay for a car loan over its lifetime based on different interest rates.
Difficulty in Getting Employment
You may need to have a background and credit check to obtain certain employment. If you have bad credit, high debt, bankruptcy or outstanding bills, it could be very difficult for you to get those jobs. Imagine what it could cost you professionally if you are locked out of a job due to your bad credit.
Trouble in Starting Own Business
Many entrepreneurs who are starting a new business may require bank loans as part of their initial startup cost. If you have not built business credit, and you have bad credit, it will be difficult if you need to use a personal guarantee for those loans. Even if you have a solid business plan you will not receive the well-needed funds to get your business off the ground.
Building credit is essential, because it impacts so many areas of your life. Having negative credit robs you of many opportunities, and it comes at a tremendous cost. Improving your credit is not as difficult as it may seem. You just need to take action to begin improving your credit. Grab a copy of this book, and begin improving your credit today.It is also very important that you monitor your credit and obtain a copy of your credit report at least annually. Under the Fair Credit Reporting Act, you have the right to obtain a free copy of your credit report at least once per year from each of the credit bureau. Visit Annualcreditreport.com. Until April 2021, you can access your report weekly through 2021. Your credit score will not be impacted.
Tanya Taylor, CPA, MBA is the founder and CEO of Grow Your Wealth. Her mission is to help 1 million professionals and business owners ditch bad debt and create a 6 or 7-figure retirement income by learning how money works in 6 steps so that they can build a legacy without feeling stuck.