When you take out a loan or swipe one of your credit cards to make a purchase, you are likely not thinking that this is a test of your reliability or personal integrity. You are more interested in how your new purchases make you feel.
However, your creditors are not worried about how your purchases affect your personal life. They just want the money back that they lent to you, with interest. The risk that you will not repay these loans is called your credit risk and for obvious reasons, lenders are not fond of giving money to borrowers that have a bad credit score.
When you have a bad credit score it does not just affect your personal finances. It can also affect other aspects of your public and personal life. Here are 7 of the effects you may see from having bad credit.
When you have a lower credit score, it affects the likelihood of being able to secure a new loan or credit application. Even if your credit score is close to the subprime level accepted by a lender, many lenders simply will not provide a loan to borrowers who fall at or below a certain level.
In practicality, a credit score of 698 does not seem that much different than a score of 702. However, if a score of 700 is important for better rates, those 4 small points can make a big difference. When considering your credit score, you should look at it as though every point matters if you want to get the best possible loans.
If you have a poor credit score and can get approved for a loan it is considered a small victory. However, it is likely that your loan will include restrictive terms combined with higher interest rates.
While all lenders are different, most are upfront about the fact that a lower credit score will result in higher interest rates. The impact of these higher rates can be large.
For example, a mortgage lender is more likely to require you to make a down payment of fifteen to twenty percent for purchasing a new home. This could be $45,000 to $50,000 for a $300,000 home. Borrowers with better credit could get away with only a 5 percent down payment, which is $15,000 in comparison.
At the same time, a single percentage point increase on an interest rate can add tens of thousands of dollars to a mortgage or a loan of any type.
If you are trying to rent an apartment or home, the landlord will likely run your credit. From a landlord’s point of view, this makes sense as an applicant who has a lower credit score is less likely to make rent payments on time.
This is one way that your credit score can really affect your life as it may determine where you are able to live. Most landlords who have desirable properties will hold their renters to a higher standard.
In contrast, landlords who own substandard properties in areas that are not as desirable are typically more lenient about credit scores. In other words, a bad credit score may mean that you end up living in a cramped apartment in a bad neighborhood.
Even though there is no proven research that shows that an employee’s credit score correlates with poor job performance, there are still many employers that check the credit of their prospective employees.
There are a few states that ban this practice, but not many and the fact of the matter is, a poor credit score could affect your ability to get the job that you want. This is especially true if you are applying for a job in a financial institution or with a government agency.
When you are discussing gaining employment or getting a home, getting a mobile phone contract seems a bit trivial, but as many more people are giving up their landlines, your mobile phone is your only real connection to the world around you.
If you have poor credit you may find it difficult to get a new mobile phone contract. Mobile phone companies pay attention to credit scores and use these scored to determine whether or not someone will get a contract.
If you cannot get a contract for your mobile phone, there are other options, but these are likely going to be inconvenient or costly. One option may include making a deposit for your phone. Another is a prepaid plan, which will require you to pay for your phone up front, which can be quite expensive.
The National Association for Insurance Commissioners stated that 85 percent of homeowners insurers and 95 percent of auto insurance companies take credit into consideration when making policy decisions.
Outstanding debt levels and timely payment history are the two most important factors of insurance companies. If you do not have a good history of these things you are likely to pay a higher premium than someone that has a better credit score.
One effect that a bad credit score can have that many people do not consider is the strain it can have on your personal relationships. Even though your credit scores do not merge when you get married, your ability to qualify for a loan can greatly affect their ability to qualify as well.
For example, if you are applying for a mortgage and you have excellent credit, but your spouse’s is just fair, the lender is going to look at both of your scores to assess the risk. Even if you are approved, you will likely pay a higher interest rate or have to make a larger down payment by applying for the mortgage together than you would if you had applied alone.
This type of situation can lead to tension in your relationship.
Overall, there are many areas of your life that can be affected by your credit score. This is why it is important to pay attention to your score and make sure to do your best to raise your score as much as possible.