Key takeaways
- If you fall into the bad credit category, you will have less favorable outcomes when it comes to getting loans to buy a house or car, or even getting opportunities in the rental and job markets.
- Prospective lenders, landlords and employers, as well as others that you approach for credit, will see you as more at risk of defaulting and will charge you higher interest rates or deny you.
- You don't have to live with a bad credit score and can proactively take steps to improve your score and your outcomes.
If you have bad credit, you might have more trouble taking out a credit card, car loan or mortgage — and if you do get accepted for a credit card or loan, you can expect to pay higher interest rates.
A FICO score of less than 669 would be considered a fair score and one below 579 is rated a poor score. If you want to get a mortgage loan to buy a house, for example, you should aim for at least a 620 score. If you do have a poor credit score, you could find yourself dealing with a variety of additional hardships on your financial journey.
What are the disadvantages of bad credit?
The effects of having a low credit score can reach fairly far and wide. The consequences of bad credit can even extend to your job search or apartment hunt. since both employers and landlords want to work with people who have a history of managing money responsibly, and your credit score is one way of showing that.
However, you don’t have to let bad credit keep you from achieving your long-term financial goals. Here, we’ll take a look at some of the main disadvantages of bad credit, as well as steps you might be able to take to avoid them.
You’ll get fewer credit card options and higher interest rates
Bad credit can make a real impact when shopping for a new credit card. You can find many credit cards or those with poor credit, but they won’t offer as many perks or benefits as cards available to those with higher credit scores. Interest rates on these cards can be extremely high — as high as 29 percent or more, or higher than the current average interest rate.
If you have a strong credit score, on the other hand, you’ll have plenty of solid credit card options available to you with lower interest rates and good cardholder perks (think: rewards, annual credit and other more premium benefits).
You might see higher insurance premiums
In general, credit scores are used to determine how likely you are to fall behind on your payments. For potential lenders, the lower your score is, the higher chance you are to miss a payment. When purchasing insurance, you have an insurance score that’s similar to a credit score (and based on much of the same information), but it also takes into account how likely you are to file a claim.
Although credit scores and credit-based insurance scores are slightly different, your insurance score is still affected by your credit history. This is because, like a credit score, it takes into account your:
- Payment history
- Outstanding debt
- Credit history length
- New credit requests
- Credit mix
Typically, the higher your insurance score, the lower the rates on your policy will be.
Your car loan options could be more expensive
When it comes time to take out an auto loan, your credit history will play a role in whether you can get your hands on a loan, as well as the rates you’ll receive. If you have strong credit, you may be able to find auto loan offers with interest rates as low as 4.29 percent. On the flip side, if you have a low credit score, you may face interest rates as high as 20 percent.
You may pay higher mortgage rates
Mortgage lenders typically fear that applicants with poor credit histories are more likely to default on their mortgage. While there is no credit score threshold that automatically disqualifies borrowers from getting a home mortgage loan, having a low score can make it difficult to find a lender to underwrite your loan.
A credit score of at least 620 will make it easier to get a conventional mortgage loan. Even if you are able to secure a mortgage with a lower credit score, you’ll likely see significantly higher interest rates on your loan. Depending on your down payment, the cost of your home, your location and other factors, you could be looking at an average of about 8 percent with a score of 620 or lower, compared to about 6.5 percent with a score of above 760. This makes the overall cost of buying a home much higher.
You’ll face steeper apartment competition
Landlords can run credit checks on potential tenants during the application process, using them to gauge whether an applicant has a strong financial history and is likely to pay rent on time each month. Landlords can only see your credit report, not your specific credit score, and they’ll likely look at the payment history portion of a credit report. If it’s reported, they can see if an applicant has been evicted in the past, which is likely to affect their decision.
Not all landlords do credit checks, but large property management companies are more likely to require one. So if you have bad credit, renting from a landlord with a smaller portfolio may be more easily attainable. Having a lower credit score can also lead to a landlord requiring a larger upfront payment. Taking on a co-signer with a good credit history can give the landlord confidence they’ll receive rent each month.
You might have to provide security deposits for utilities
Your utility providers take your credit report — particularly, your payment history — into consideration when setting up your account. If you have a poor payment history, chances are you’ll need to provide the utility company with a deposit to get service.
Although the FTC outlines that utility companies requiring deposits must require them for either all new customers or none, many providers waive deposits as long as you meet their credit criteria. This means that the poorer your credit, the more likely you are to pay a deposit when setting up an account. Some utility providers may also accept a letter of guarantee, which is a letter from someone who agrees to pay your bill on your behalf if you can’t make the payment.
Your job applications could be flagged or even disregarded
One somewhat unexpected scenario in which your credit score plays a role is during a job search. Some employers review a candidate’s credit history during the application process as a way to gauge how reliable and responsible you are. Seeing patterns of late or missed payments or a history of defaulting on loans can be a red flag to potential employers that you won’t be a responsible, reliable employee.
You might face difficulty starting a business
Sometimes it takes money to make money. If you’re starting a business and need funds to make that happen, a low credit score can make it harder to be approved for a business loan or a business credit card at good rates. Even if you can get your hands on a business loan that accepts a low credit score, chances are you’ll receive a lower loan amount and higher interest rates than you’d get with a higher credit score.
The bottom line
While bad credit can make it harder to access credit cards, loans and mortgages — and might even affect your job prospects — there are plenty of ways to improve your credit history and build your credit score.
Start by making on-time payments on all of your current credit cards and begin paying down your old debt. Consider taking out a secured credit card or personal loan to build a positive credit history and increase the amount of credit available to you. Your credit score should improve as you continue to practice good credit habits and use credit responsibly.
