If there’s one thing that every consumer needs, it’s good credit. Bad credit can ruin your financial life as well as affect other areas of your life that you may not even realize. If you think that a hit here or there on your credit isn’t a big deal, keep reading to see just how important that credit score and credit history really is to you.
You Won’t Get the Lowest Interest Rates
When you shop for a home loan or auto loan, the first thing you probably ask is ‘what’s the interest rate?’ You, like most people, want the lowest interest rate possible, as you should. Every small increase in your interest rate is more money you pay to the bank to let you borrow the principle. You could probably think of better things to do with that money.
If you want that good interest rate, though, you are going to need good credit. Bad credit will prompt a lender to increase your interest rate. They do this because they base your interest rate on your risk level. The higher the risk of default that you pose, the higher the interest rate a lender will charge. Your credit score is one of the first and largest factors they consider when determining your risk of default.
You May not get Approved for a Mortgage or Car Loan
Worse than getting the higher interest rate, you may not even get approved for the loan in the first place. Lenders typically pull your credit before they look at any other factors on your loan. If your credit score is too low, they may not move forward with the loan application. It won’t matter how much money you make, how much money you have to put down on the home or car, or anything else because a bad credit score leaves a bad taste in the lender’s mouth. They won’t want to take the chance of becoming another one of your unpaid or paid late creditors.
You May Pay Higher Loan Costs
If you do find a lender that is willing to approve your loan application, be prepared to pay higher fees. Lenders often charge origination fees or points on loans that are ‘risky.’ These points are like prepaid interest. It’s the lender’s ‘insurance’ by receiving money upfront. This way if you do default on your loan, at the very least, they made a little profit on it from the start.
You May Pay Higher Insurance Rates
You probably think your credit score has nothing to do with your insurance, but it does, especially with car insurance. If you have a low credit score, you are seen as ‘irresponsible.’ Think of the car insurance companies that insure you to be behind the wheel of a car. If you make poor financial decisions, how does the insurance company know that you make smart decisions behind the wheel of a car?
Most insurance companies will increase their rates in order to make up for this risk. You may shop around to find different insurance companies, but chances are they will all give you an inflated rate because of your bad credit.
You May Not be Able to Rent an Apartment or Home
Even landlords want to know what your credit history is like. They are giving you access to their home or apartment to live in and they expect to be paid. If they see that your credit score is low, they may think you have a low likelihood of actually paying your rent on time. This may prevent the landlord from considering you as a tenant.
You May Not Get the Job You Want
Not all employers check your credit, but many do today. They want to know that you are a responsible person. If you have bad credit, it says anything but ‘responsible.’ It lets lenders know that you have made mistakes in the past. The employer may inquire about these issues or they may just not choose you for the job.
You May Not Get Approved for Various Services
Today, even cellphone and cable TV providers pull your credit. They want to know if you are going to pay your bills or if you will default in the future. While some services may still offer you a package, it will likely be at a higher cost. Some providers, however, won’t provide services at all for fear of the risk of default.
As you can see, bad credit can affect many areas of your life. It’s not just the loan approval that you may or may not get. It is the place to live, the job, and the services that you may not get as well. If you do get these things, plan to pay a pretty penny for them, which you can chalk up as a waste of money since you pay extra just because of the risk that you pose.