The Side Effects of Bad Credit

Oct 18, 2023 By Triston Martin

Trouble Getting a Loan

Banks want to know how likely they are that you will repay the loan before giving you a new loan. FICO and VantageScore are two of the main ways banks make this assessment. These credit-scoring models use information from your credit reports, including loan balances and payment history, to assess your creditworthiness. Low credit scores can make it difficult to borrow money, whether you're looking for a car loan or a mortgage. To compensate for the high default risk, you will likely pay higher interest rates if approved. Credit card issuers often require credit scores that are between "good" or "excellent." This means a FICO score of at least 670 and VantageScore 700 or higher.

A minimum FICO score of 620 is required to purchase a home using a conventional loan. FHA mortgages can be obtained with as low as 500 scores. However, you must put down 10% and pay mortgage insurance. This will increase your borrowing costs. You may have to borrow money quickly if your credit score is not good enough and you face a financial emergency. Although credit problems can make it difficult to get an emergency loan, there are still options.

Fewer Options For Renting

Poor credit history isn't just something home buyers have to worry about. This can also come back to haunt your ability to rent. Like banks, landlords want to assess your ability to pay on time before handing over keys to a property. Typically, landlords will request your credit report as part of the application process. It can be difficult to get a new home if you have made mistakes in borrowing. You can overcome bad credit by getting a cosigner or offering to pay a higher deposit. However, it is much easier to get in with a good score.

Good credit history is just as important for older people as it is for younger adults. Long stays in a nursing home or assisted Medicare does not cover living centers. These establishments have to rely on private donations. Before admitting someone, they often check their credit to ensure the applicant can pay the bill.

Higher Insurance Costs

Many consumers don't realize the cost of higher auto insurance premiums when they have a large credit card balance or fall behind with their mortgage payments. Even though some states ban it, this is what some insurance companies do. Research has shown that poor credit scores correlate with drivers' likelihood of filing claims through their auto insurer. Your credit score will determine your likelihood of being involved in an accident. The Zebra, an insurance comparison website, released a report in 2019 that drivers with low credit scores paid twice as much as those with excellent scores.

Other types of insurance may review your credit report. Some homeowners' and renter's policies use a proprietary credit scoring system to determine their rates. However, life insurance companies do not typically consider credit scores when underwriting, making it more difficult to obtain a policy or get the best rates if your bankruptcy is recent.

Getting Denied Employment

Some jobs, particularly those in finance or upper management, require good credit histories. Negative credit reports, such as bankruptcy or high amounts of debt, can lead to you being turned down for jobs. Employers will check your credit report, not your credit score. Employers will not check for bad credit but may look for things that could impact your job performance.

Higher Insurance Premiums

Insurance companies often use credit scores to help assess risk. To determine your rate, they use credit-based insurance scores. The rate you pay will depend on your credit score. If your credit is poor, your rate will likely be lower. Your credit score is not the only factor that determines your premium rate. Many other factors play a role as well.

Difficult to Start Your Own Business

Bank loans are often required by new businesses to fund their start-up. Even if your business plan is solid and you have the data to support it, a bad credit history could limit your ability to borrow money to start a business.

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