THE NEGATIVE IMPACT & LIFE DISADVANTAGES OF BAD CREDIT- AND WHAT YOU CAN DO ABOUT IT

Home & Family

UPDATED: November 25, 2020

Most Americans do not realize how significantly a low credit score impacts their lives in a negative way. Financial lenders, businesses, insurance companies, employers, and dozens of other entities will check your credit score before deciding if they want to enter into a relationship with you. If your credit score is low, it could cause you to be declined for a specific loan, turned down for employment, pay huge interest rates, and even make it next to impossible to rent an apartment or house that you want.

There are dozens of variables that go into calculating your FICO score.  Your FICO score is a credit score developed by the Fair Isaac Corporation, and is the largest and most popular company that provides software to calculate your credit score.  Fair Isaac is an independent, for profit company and has nothing to do with the government.

While the exact algorithms the software uses to calculate a credit score are not common knowledge, there are many things we know that impact your score, and many of these can cause your credit score to plummet if not managed properly.

For example, paying a bill late will have a negative impact on your score.  The later you pay, the worse it affects your score.  Paying it 30 days late is better than paying it 60 days late, which is better than paying it 90 days late or not at all. Bankruptcy, foreclosure, collections, charge offs, and liens all have a significant negative impact on your score.

The most common ways individuals negatively impact their credit score is either by having no credit at all, or not enough credit and continuously making large purchases on their credit card, which will eventually lead to maxing it out. Maxing out a credit card is when you have spent the maximum limit on the card. Once you max your card out, your credit score may drop significantly.

5 MAJOR LIFE DISADVANTAGES PEOPLE WITH BAD CREDIT WILL FACE THAT PEOPLE WITH GOOD CREDIT WILL NOT

Fair or not, the reality is that individuals with bad credit will face many obstacles that people with good credit will never face. Let’s take a look at the 5 most common ways that people with bad credit are at a disadvantage.

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1. You will be TURNED DOWN for most loans you apply for.

Seeking a loan is a common part of the process for buying a house, or car, as most people cannot afford to pay the full amount out of pocket. Creditors and lenders frequently review applications for loans. When they come across an individual who is seeking a loan but has a low credit score, they typically see this person as a higher risk. This makes loan companies hesitant to lend the funds that you may need, as they worry that you will not pay it back.

  • If you are eligible for a loan, you will pay SKY-HIGH INTEREST rates compared to those with good credit.

You may get lucky and receive a loan for the item you wish to purchase. However, you will most likely receive a very high interest rate to go with it. Being considered a “high risk” with bad credit, the lender or creditor is willing to take on more risk by approving you for the loan, but they will charge a high interest rate to compensate for that risk. In the end, this means that you will have paid EXPONENTIALLY more toward the interest than the actual item that you needed the loan for in the first place.

     3. You will pay OVER-PRICED insurance premiums on your car, home, or  most other insurances that you apply for.

Insurance companies are known for checking credit scores before issuing insurance to people. Often, insurance companies state that low credit scores lead to more claims filed each year. If they see that your credit score is low, they may approve you for insurance but only after sticking you with a rate that may not be affordable.  This effects your ability to drive a car, own a home, or protect your assets.



      4. You may be PASSED OVER for employment and find it difficult to get a meaningful job.

When applying for jobs, you may be surprised to find out that a company or potential employer will check your credit before moving forward in the hiring process. Upper management as well as financial department positions commonly check their applicants’ credit history, as they have specific criteria needs that each of their employees must meet. Most commonly an employer will look for any bankruptcy, bad debt, late pays, and in some cases how much total debt you have.

      5. You may NOT QUALIFY to rent the apartment or home of your choosing and will be stuck with something you really don’t want

An apartment or house search can be time consuming and tough all by itself, but it can become even more complicated with a low credit score. The majority of the time when individuals are searching for a new place to live, they will learn they must possess a certain credit score to be eligible. You have to remember that you are competing with many other individuals when you submit an application to rent a piece of real estate. If someone else has much better credit than you, they will likely be approved instead of you. When a landlord sees a poor credit score, they assume that you are a higher risk which translates into a higher possibility you will be late on, or not pay your rent.

Having bad credit comes with a lot more consequences than you may have thought. However, there is much that can be done to help you overcome bad credit and get your credit and finances in order.

HOW TO IMPROVE YOUR CREDIT SCORE QUICKLY AND EASILY

After understanding the negative consequences that result from having a low credit score, it is important to try to rebuild your credit and get back on track. It is not uncommon for people to experience financial problems at some point throughout their life, but what you choose to do afterwards is what really matters.

If you’re trying to improve your credit score that was damaged by previous financial issues, there are several things you can do. 

  1. You should start by obtaining a copy of your credit report and review it for accuracy.  Check it for accuracy in terms of trade lines reporting, balances, any late payments or, public records.

  2. If you find any reporting errors, you should contact the credit bureaus and request it be removed or corrected.  If you are not familiar with how to do this, or simply don’t want to do this on your own, you can hire a credit repair company to assist you.

  3. Whether you are trying to repair previously damaged credit or trying to establish credit for the first time, you may want to apply for a secured credit card.

Since a secured credit card is often one of the best options recommended to individuals interested in rebuilding their credit, we have researched and compiled what we believe are the 5 best secured credit cards in 2020. Many do not even require a minimum credit score! However it is crucial to acknowledge that this option can be a quick process for some and longer for others, depending on whether you are trying to establish first time credit, or repairing already damaged credit.

This is not a one-way path for everyone; each person will have a different experience. Some individuals may experience a significant improvement in their credit within a few months, while others may experience a longer time frame based on how damaged their credit is. However, the wait will be worth it in the long run.

UNDERSTANDING THE OPTIONS AVAILABLE TO YOU

A secured card is a great tool to begin rebuilding your credit, as it is designed for individuals with credit problems and challenges. To receive a secured credit card, you must put down a deposit. The credit card issuer will hold your deposit in case you do not make your payment.

The reason that the credit card issuer requires a deposit be paid is to safeguard themselves from losing any funds. Your deposit will be returned as soon as you qualify for an unsecured credit card or close a credit account that is up to date on payments.

As time goes on and you continue to use your secured card, the issuer will report your spending and payment activity to the credit bureaus (the companies that report your credit score). The objective is to never miss a payment, never pay your monthly bills late, and to aim to keep the balance on the credit card low (below 50% of available credit). This will help raise your credit score.

If you find yourself ineligible for a secured credit card (which is rare), a couple alternative options to consider are credit-builder loans and personal loans. Credit-builder loans are usually offered by small financial businesses, such as small banks or credit unions. With a credit-builder loan, you are given money which automatically goes into a savings account. You are required to begin paying the loan off in monthly payments. After you have paid off the loan, the money will be provided to you, and the credit report will show that you have paid off a loan.

A personal loan can either be unsecured or secured. An unsecured loan will generally have a higher interest rate than a secured loan. Depending on your credit score, the higher or lower your interest rate may be as well as which type of loan you may qualify for. Both, a credit-builder loan and personal loan will help improve your credit score as long as you make the payments on time.

HOW TO START IMPROVING YOUR CREDIT TODAY

Review the 5 best secured credit card options for 2020 and determine which one is best for you. You must be at least 18 years of age, residing in the United States, and have income. Once the issuer has received your application, they will determine if you will qualify for the credit card.

If you are approved, the issuer will require a small deposit be paid. Once they receive your deposit, the credit card will be mailed out. It is recommended to try to stay below 50 percent of the credit limit to avoid maxing out the card. Therefore, you should make a few small purchases and pay them off quickly each time.

A secured credit card is not seen any differently than an unsecured credit card. The only parts that are being assessed are the date that it was opened, the credit limit, the balance, and the payment history. Therefore, a secured credit card can help you rebuild your credit just like an unsecured credit card.

After your credit is improved, the credit card issuer may begin recommending unsecured credit card options. You may also send a request to upgrade to a better credit card. If they do not offer unsecured credit cards, you can begin applying for some with other companies.  As your credit improves you will find yourself being solicited by credit card companies offering you unsecured cards. 

So what are you waiting for?  Start improving your credit and finances today and you’ll be glad you did. Or, do nothing and keep living at a disadvantage.