Ignoring a bad credit score is pretty easy to do, but it does come with some serious consequences. In fact, you could end up spending a lot of unnecessary money in areas throughout your life simply because of that low score.
The first step to fixing the problem is to understand exactly how much bad credit is costing you. From higher interest rates to bigger insurance premiums, you’ll discover hidden expenses in all sorts of areas of life.
Here’s how to figure out what financial impact your bad credit has on your life, plus how to fix it.
How having bad credit can cost you
A bad credit score could be costing you in more ways than you realize. Here are some of the most common financial effects experienced by people with poor credit.
High APRs on loans and credit cards
The most obvious way bad credit costs you money is in the form of high interest rates. Not only are you much less likely to get approved for new loans or credit cards, but you’ll also still pay more if your application is accepted. You’ll have a much higher APR, which makes it more expensive to carry a balance.
A sudden drop in your credit score can also cause your current credit card APR to increase since card companies intermittently run credit checks on existing customers. You may receive a notice that any new charges will be subject to the higher rate.
Limited access to regular financing
It’s difficult to get approved for traditional loans when your credit score is below average. Whether you need a personal loan for a financial emergency or want to apply for a new credit card, you’ll have a harder time working with reputable lenders or qualifying for favorable terms.
Instead, you may be forced to resort to expensive, high-risk financing like payday loans. It’s common to become trapped in a cycle of debt that’s hard to pay off as you continually accumulate more fees.
Ongoing cash crunch because of large minimum payments
Bad credit also costs you money when you’re trying to keep up with large minimum payments on your credit cards. Not only are you continually accumulating interest when you carry a credit card balance, but you’re also hurting your monthly budget.
A lack of cash flow may hinder your ability to pay other bills on time, which could result in late fees. Even if you can pay your bills on time, you may not be able to save as aggressively as you’d like to. The next time you face a financial emergency, you could have limited options if your extra cash has gone towards high credit card payments instead of your savings account.
More expensive insurance premiums
It may surprise you to discover that insurance companies typically run a credit check before issuing a policy. The reason is that research shows that lower credit drivers tend to file more claims than those with higher credit. As a result, you’ll pay a higher premium for auto insurance when you have bad credit.
Saving money on your car insurance may be more attainable than you think when working on your credit score. The Zebra’s 2019 State of Auto Insurance Report reveals that increasing your credit score by just one tier can save you 17% on your auto insurance premium.
Difficulty qualifying for housing
Your credit score plays an important part in both buying a house and renting an apartment. When you’re house hunting, your lender checks your score to approve your application and determine your rate. And if you’re applying for an FHA mortgage, having a low credit score could require you to come up with a larger down payment.
Rental applications also include a credit check and yours could be passed over when competing against other applicants with higher credit scores. Even if you are chosen, your landlord could make you pay a larger security deposit to offset the risk of missed rent payments. Ultimately, that means less cash in the bank for you.
Deposit requirement for utilities
Many utility companies run a credit check when you first open your account. If you don’t meet their minimum requirements, you may have to pay a deposit in order to set up the service. You’ll eventually get the funds back, but again, you’ll limit your own cash flow when this happens.
Limited job opportunities
Some employers also require a certain credit score as part of the screening process. Any company in the finance, law enforcement, or government fields is likely to run a credit check. And employers in any field are more likely to check your score as you climb the corporate ladder for management positions. Having a bad score could limit your job growth, and consequently, your long-term earning potential.
How to start building (or rebuilding) credit
Bad credit certainly does add a lot of expenses to your life. Luckily, your credit score doesn’t define you, and even better, it’s not permanent.
Pay your bills on time
Did you know that your payment history is the largest contributing factor to your credit score? That makes it essential to pay every bill on time each month. Set up calendar reminders or schedule automatic payments to help yourself remember those due dates.
Late payments also cause more damage to your credit score the longer they go unpaid. If you have current overdue balances, make a payment right away to bring your account current.
Get a credit builder loan
Some banks and credit unions offer credit builder loans, which are designed to contribute positive payments to your credit report. It’s not entirely borrower-friendly in that you don’t get access to the funds until you’ve paid off the loan entirely. Plus, you’ll still be charged interest, so there is a cost associated with this strategy.
Self is a good choice if you’re looking for a credit builder loan. They make the process simple. You can start by paying as little as $25 a month, with a term length that works best for you. Each on-time monthly payment that you make builds your credit history and adds to your savings. At the end of the term length, you’ll have a loan already paid for!
Create an emergency savings account
Keeping more money in the bank doesn’t directly improve your credit score. But it does set you up for financial success, and that definitely impacts your score. An emergency savings account gives you a safety net that helps you avoid getting backed into a corner later on. When a sudden expense pops up, you won’t have to charge it on your credit card or seek out high-risk financing like payday loans.
Start with a $500 goal for your emergency savings, then try to save enough to cover at least three to six months of expenses. Use MU30’s Emergency Fund calculator to find out how much you should be saving. Anytime you dip into your savings account, replenish the funds as soon as you can.
Decrease your credit utilization ratio
The next biggest contributor to your credit score is your credit utilization. It’s basically the amount of debt you have compared to your available credit. In other words, keeping large balances, especially on revolving credit lines like credit cards, hurts your credit score.
The solution is to work on paying off your large balances. There are plenty of strategies out there for paying off debt, like the snowball and avalanche methods. No matter how you do it, lowering those balances (while keeping up with all of your other minimum payments) will help to improve your credit score.
Become an authorized user on someone else’s account
You can have a close friend or family member add you as an authorized user on one of their credit cards, but this strategy does come with some risks. The benefit is that any positive activity associated with that account is added to your credit report. That includes on-time payments, low balances, and a longer credit history.
But any negative characteristics are also reported as part of your credit. If the cardholder misses a payment or racks up a huge balance, all of that information appears on your own report.
Open a secured credit card
A secured credit card is another way to build your credit score by making on-time payments. In order to open a card, you typically need to make a deposit that equals your credit limit. So if the card has a $500 line of credit, you would deposit $500 to the creditor.
You’ll eventually get that money back once you establish a positive payment history and meet the requirements to bump up to a better card. You can also charge purchases to the credit card just like a normal credit card. But if you don’t pay off the full balance, you’ll still be charged interest.
Credit card to help you build or rebuild your credit score
Looking for a credit card that can help improve your credit score? Here’s a top pick to consider.
OpenSky® Secured Visa® Credit Card
The OpenSky® Secured Visa® Credit Card is designed specifically for people with bad credit. In fact, there’s not even a credit check as part of the application process. Since you’ll need to make a refundable deposit, you can choose your own credit limit, ranging anywhere between $200 and $3,000. That gives you more flexibility than other cards that come with a predetermined deposit and credit limit.
Your payments are also reported to all three major credit bureaus: Equifax, Experian, and TransUnion. As long as you charge a small amount each month and pay off your balance in full, you’ll build your credit score little by little.
A bad credit score has a major financial impact across multiple areas of your life. Instead of worrying about past money experiences that may be lingering on your credit report, focus on the positive changes you can make today.
Get better at managing your money by creating a system to pay your bills on time. Also, work on building an emergency fund so you can avoid high-interest debt while you continue to improve your credit. Over time, all of these actions will not only lead to a better score but better financial footing as well.