It sounds like an oxymoron, but being poor is actually really expensive. The same principle is true with bad credit. Not only does it make borrowing money more expensive, it can also affect your life in surprising ways. From your cellphone bill to your car insurance, bad credit can make everything cost more. Your FICO score ranges from 300 to 850, with 850 being a perfect score. What exactly counts as a bad score, though? Here’s a general range, according to Credit.com.
- Excellent Credit: 750+
- Good Credit: 700-749
- Fair Credit: 650-699
- Poor Credit: 600-649
- Bad Credit: below 600
Here are some of the surprising ways bad credit can affect your life.
Getting a Job Might be Harder With Bad Credit
Some employers look at credit scores when choosing who to hire. Fairly or not, some people use credit scores as a gauge of a person’s trustworthiness, and some employers are hesitant to hire people with low scores. Over one-third of employers put some or all of their potential hires through a credit check, and one survey claims that a shocking 10% of middle- or low-income Americans have lost a job offer because of their credit. In fact, 14% of employers rate a credit check as the most important factor when deciding whether to offer employment.
Cars Can Be More Expensive With Bad Credit
If you want to buy a car, you may need to take out a car loan. Chances are, if you have a low credit score, the loan is going to be more expensive, if you are approved at all. In most cases, bad credit means higher interest rates, which means you’ll spend more over the life of the loan. And it’s not just car loans. The same goes for insurance. In most states, car insurance rates can be partially based on your credit score. The big exceptions are California, Massachusetts and Hawaii, where this is illegal.
Bill Providers Might Charge More for Bad Credit
As hard as it is to believe, even your cellphone and cable bills can be affected by a poor credit score. In legalese this practice is called “risk-based pricing.” In plain English it means “if you have bad credit we can jack up your bill.” All the company has to do is send you a risk-based pricing notice, and voilà, you’re paying more. Sadly there is nothing you can do about this, short of cancelling your service or increasing your credit score.
You Miss Out on Rewards
Provided you use them responsibly, credit cards are great for earning rewards. Some can even pay for your travel For example, the Chase Sapphire Reserve card had such a generous introductory offer that the company’s profits took a $300 million hit. Other high-end credit cards offer free nights at luxury hotel chains or tens of thousands of airline miles, good enough for a long-distance trip. Unfortunately, it is nearly impossible to get these cards unless you have a very good credit score. Other cards have great introductory cash-back offers like a $150 rebate on $500 of spending. If you were going to spend that $500 anyway, that’s $150 of free money. It’s ironic, right? The people who need that extra cash the most will find it hardest to get that deal.
Borrowing Is More Expensive…
Again, loan terms are usually worse with bad credit. In other words, if you’re approved for a loan at all, you can be almost certain your interest rates will be higher. If you’re taking out a 30-year mortgage, even a tiny change in your interest rate can cost you tens of thousands in the long run. While a 4.49% interest rate might not sound much different from a 4.1% interest rate, on a $250,000 30-year fixed mortgage the lower interest rate saves you over $20,000. Visit the myFICO Loan Savings Calculator to compute your own potential savings (and losses) if your credit score changes. The same logic applies to plastic. If you have bad credit and are carrying a balance on your card, you’re likely paying higher interest rates than someone with good credit. Ironically, this makes it harder and harder to pay down the original balance, which simply underscores the importance of minimizing credit card debt.
…and Sometimes Impossible
If your credit becomes very poor, it may be difficult to get any sort of loan at all. Even those with good credit are not totally immune. After the financial crisis, even people with stellar credit sometimes found it hard to get loans. Since it is difficult to predict when the next crisis will hit, you should always try to keep your credit as solid as possible. In five or ten years, this list may seem quaint. To minimize risk, car insurance companies are starting programs that constantly track your driving habits. If you’ve got poor credit (or a history of accidents), you may be forced to accept this tracking. Some car lenders have even implemented kill switches which allow them to disable a car if you miss a payment. One woman could have died when her lender disabled her car as she drove it on the interstate. China is planning to implement a “social-credit” score that will not only track whether you repay your debts, but whether you visit your grandmother. Low scorers may be denied the ability to buy plane tickets or a house. These examples sound like they’ve been ripped straight from an episode of Black Mirror, but they’re real. Keeping your credit score as high as possible is important now, and it seems like it will only become more important in the future. The best way to improve your credit is to pay your debt bills in full and on time. While there are certainly short-term hacks that might hike up your score a bit, your payment history is the biggest factor that affects your credit. A history of timely payments will help your score more than anything. Credit utilization also makes up a large percentage of your score. The less of your available credit you use, the better. Again, this means paying off debt balances, but it’s also wise to keep lines of credit (like credit cards) open without actually using them. For more details on how your credit score is calculated, FICO breaks it down on their website here.
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