4 major costs of bad credit
When you swipe a credit card or take out a loan to make a purchase, you probably don’t think of the experience as a test of your personal integrity or reliability. You’re more interested in how you’ll feel behind the wheel of your new car, walking through your new home’s kitchen, or sitting in front of your new flat-screen TV.
But your creditors don’t care about how your purchasing habits improve your personal happiness or quality of life. They just want to recover the money they lent you – with interest.
The risk that you won’t repay your loans is known as your credit risk. For obvious reasons, lenders don’t like borrowers with elevated credit risk. With less than perfect credit, you may have difficulty obtaining favorable terms on an unsecured personal loan – or finding a lender willing to issue an unsecured loan to you at all.
Your credit score (and by extension your overall credit profile) don’t just affect your personal finances. Your credit influences many aspects of your personal and public life, including plenty that don’t involve borrowing.
That being said… here’s a look at what having a bad credit score could cost you!!!
Getting Approved for a Loan Can Be Difficult
Your credit score directly affects your likelihood of securing approval for a new loan or credit application. The lower your score, the less likely you are to find a willing lender. Even If you’re close to your lender’s prime-subprime or quality level cutoffs, many lenders simply don’t make loans to subprime borrowers or those who fall below a particular quality level. Though this can feel like the lender is being capricious, many borrowers can be affected by this in real ways.
Practically speaking, a credit score of 698 isn’t much different from a credit score of 702 – but if 700 is an important level, those four points can make all the difference.
Higher Rates and More Restrictive Terms on Approved Loans
Getting approved for a loan counts as a victory. But if your loan comes with an unfavorable interest rate or restrictive terms, it could soon feel like a hollow one.
Every lender is different, and most are cagey due to the proprietary nature of internal borrower evaluations. But most are upfront about the fact that lower credit scores mean higher interest rates. According to Bank of America, “A higher credit score may help you qualify for better mortgage interest rates…and some lenders may lower their down payment requirement for a new home loan.”
Trouble Renting an Apartment
If you’re applying for an apartment lease, the landlord is likely to run your credit unless local laws explicitly forbid the practice. From the landlord’s perspective, the need for a pre-lease credit check is understandable, as applicants with lower credit scores are statistically less likely to make timely rent payments. Landlords are especially wary of applicants with patterns of late payments, delinquencies, foreclosures, and bankruptcies in their credit reports.
But if you’re an applicant, this arrangement may not feel fair – and it can have a major impact on where you end up living. Landlords who own well-kept, modern properties in desirable neighborhoods typically hold renters to higher credit standards, since robust demand for their properties affords them the luxury of picking and choosing who they rent to. (A few years ago, my now-ex-landlord flatly told me that he didn’t rent his best properties to anyone whose credit score came in below 640.) Larger management companies are more likely to have strict standards as well.
By contrast, landlords with substandard properties in undesirable areas – properties for which demand isn’t as high – can’t pick and choose their renters as carefully and are thus more likely to be lenient regarding credit. In other words, a bad credit score could land you in a cramped, fraying apartment on the wrong side of the tracks.
Trouble Getting a Cell Phone Contract
Getting a cell phone contract sounds trivial when you’re worried about finding a job or place to live. But as many people – particularly renters and the young – forgo landline phones entirely, your cell phone is quite literally your connection to the world around you. It’s just not feasible for many folks to live without a cell phone.
Unfortunately, cell phone carriers pay close attention to prospective customers’ credit when determining whether to approve a new contract. The reasoning is similar to landlords’: Basically, higher-risk customers are less likely to make timely payments or have enough money in their account on the auto-debit date. Even if you’re only interested in a month-to-month cellphone plan, your carrier is still likely to run your credit due to the fact that it’s easy to rack up excessive charges for things like high data usage, roaming, and international calling in a single month.
If your credit score isn’t sufficient to qualify you for a cellphone contract, you still have options – they’re just likely to be costly or inconvenient. Some carriers accept security deposits in an arrangement similar to a secured credit card. If you make timely payments, you generally get your deposit back after a year or two. A prepaid phone plan is another option, though such plans typically don’t subsidize the cost of the phone (potentially adding hundreds in upfront costs), don’t come with state-of-the-art phones, and can have restrictions on talk and data usage.