How Bad Credit Can Cost You, Big Time
When you have good credit, financial transactions that involve borrowing money generally go a lot smoother. You can walk into a lender with confidence and, if you don’t like the terms you see from this particular lender, you can easily go elsewhere and another lender will more than likely be happy to have your business.
When you have bad credit, however, it’s a totally different story. Lenders may very well work with you, but financial matters can be stressful. Walking into a lender, you may feel a bit nervous. “Is my credit high enough to get approved?” you may anxiously wonder to yourself. You have to take whatever terms are available to you if you want to borrow and your overall options in general are much more limited.
Credit in America
As of 2012, the average American had a credit score of just under 690, which is only a “so-so” score, and according to data published on Card Hub, around one-in-three (35 percent) consumers had a score under 650, which placed them in the below-average or bad credit range.
Why do people have bad credit? Of course, financially literacy issues, high debt, and inadequate budgeting play a role. Then there are those who damaged their credit immediately upon reaching adulthood. This can take time, energy, and money to repair that some people simply don’t have. Other times, bad credit is the result of financial struggles where people simply don’t earn enough money to cover their expenses — for those individuals, bad credit comes along with being broke.
Having bad credit often results in a vicious cycle. Your mortgage payment on a home, or your payment on a vehicle, is substantially higher than it would be if you had good credit. You may be financially struggling to pay debts, thereby leading to having bad credit in the first place, which therefore leads to higher rates and payments for future debts, which then leads to more financial troubles down the road. It all comes around full circle.
As if high APR and difficulty being approved wasn’t bad enough, having bad credit can even cost you job opportunities. According to data published on CNN, from 1998 to 2010, the percentage of employers who checked all or some of their candidate’s credit files rose from 25 percent to 60 percent. Your credit can deter you from obtaining a job for which you are qualified.
When opening accounts for utilities, like electricity or water, your credit score can be the difference between paying a deposit and signing up without any form of collateral. Even when changing cable or satellite dish providers, a poor credit score may result in a hefty deposit. Since businesses view those with bad credit as a risk, they take measures to protect themselves in spite of the financial impact this may have on certain consumers.
Really? Insurance, Too?
So, with bad credit, you have to pay higher rates, pay a deposit to service providers, and you may even have trouble finding a job in some cases. Then, in addition to all of those costs, you may also face higher insurance premiums.
When we think of insurance, we generally think of paying a monthly fee for protection in the event that something bad happens. What does bad credit have to do with something bad happening? Apparently, there is a statistical correlation between your credit score and the likelihood you will file an insurance claim. This is similar to the manner in which insurance companies evaluate factors like your age and gender.
Insurance Quotes recently studied the impact a credit score has on homeowner’s insurance rates. The vast majority of providers — 95 percent of auto insurance companies and 85 percent of homeowner’s insurance companies — use credit to help determine premiums in states where it’s allowed.
According to the Insurance Quotes study (which you can view here), “if you have poor credit rather than excellent credit, your premium nearly doubles — your rate may increase by an average of 91 percent.” Only three states — Maryland, California, and Massachusetts — do not allow credit sores to be used when calculating premiums.
If You Have Bad Credit …
So, increased homeowner’s and auto insurance premiums is yet another way having bad credit can hurt your wallet. The Insurance Quotes Study provides the following tips on how to boost your credit score and save on premiums:
- Pay all of your debts (credit card payments, installment loans, etc.) on time.
- Avoid opening unnecessary credit accounts.
- Keep utilization low by maintaining low credit card balances. Ideally, you should keep your balances under 25 percent of your limit.
- Shop around. If your credit score is increasing, but your premium doesn’t decline over time, look for a more affordable policy.
Those tips will certainly help, but once credit is severely damaged, it can take time to fix. The first step to getting back on track is changing your mindset. Sometimes, those with bad credit begin to think “oh, well, my credit is already bad, I can’t make ‘bad’ much worse.” But, in reality, filing bills for debts “under T for trash” will continue to worsen the situation. Make repaying your debt and fixing your credit a priority, just as you would anything else that’s important to you.
As an example, consider this fictional situation: Person A — who has good credit — pays low interest on her car, has a $250 car payment, carries no balances from month to month on her credit cards, and her home loan rate is decent at around 4 percent, leaving her with a $1,000 per month mortgage payment. She has no deposits on utilities, and her homeowner’s and auto insurance rates are also low to reflect her good credit score.
Person B, however, has bad credit. She has the same car as person A, but her bad credit caused her payment to increase to $350, and her home and auto insurance payments to go up by $50 each per month as well. Her mortgage payment is $1,100 instead of $1,000, because her rate was not as good as person A’s rate. She also had to pay a deposit of $200 to her satellite TV provider at the beginning of the year, and another $100 deposit to her electric company.
Over the course of one year, person B pays around $4,000 more than person A for exactly the same lifestyle — all because of her credit. It’s never too late to start repairing your credit and if you need additional assistance, discuss your credit file with a financial professional or credit counselor.