Your credit history is with you from the time you open your first credit card or take out your first loan until the time of your death. You can’t get rid of it, so you need to make sure it presents you in a positive light. Even if you don’t intend to borrow money often, a bad credit score could still hurt you in other ways. Here are some ways that bad credit can make your life difficult.
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1. Denied loan and credit card applications
Lenders are reluctant to work with people with poor credit because their low score indicates that they have not been responsible for the money in the past. There is an increased risk that they will not be able to repay the money, so many lenders simply refuse to work with them.
This is problematic when you want to finance a large purchase or need cash quickly. Some potential borrowers with poor credit turn to expensive alternatives, like payday loans, which have less stringent qualification requirements, but these often make debt problems worse instead of improving them.
2. Higher interest rates
If lenders approve borrowers with fair or poor credit, they will generally charge them much higher interest rates than they would with borrowers with good or excellent credit. The lender makes a bigger bet on those with poor credit, so they want a bigger payment. If the borrower is unable to meet the payments, the lender will not lose as much money because he received more money in interest each month than he would from a borrower with good credit.
Your interest rate will vary depending on your credit condition and the type of loan you are trying to take out. Unsecured loans, like personal loans, usually have higher interest rates than secured loans, like car loans or mortgages, because there are no assets that the lender can seize if you don’t pay. .
3. Difficulty finding a job or an apartment
Increasingly, employers are checking the credit reports of potential employees, especially if the position they are applying for involves managing company or client funds. Some also see it as a general measure of accountability. Landlords can also perform credit checks to screen out potential tenants, and bad credit could cause them to turn you down.
No one can retrieve your credit report without your permission. But if you decline the credit check, you are unlikely to get the job or the apartment because the employer or landlord might think you are trying to hide something.
4. Deposits required by utility companies
You probably don’t think of utilities as a form of credit, but they are, in a way. Utility companies provide services to you with the understanding that you will pay for them at the end of the month. If you don’t pay what you owe, they can’t take back the services they’ve already provided and might need to employ a collection agency to get money from you.
People with low credit may find that utility companies charge extra fees to open an account. If your credit score is low, they may ask for a security deposit in case you don’t pay your bill. Or you may need to find a co-signer who agrees to pay your bill if you are unable to do so.
How to improve your credit
You might already be dealing with these hassles if your credit is bad, but it doesn’t always have to be. You can increase your credit score over time by demonstrating responsible behavior. If you have negative ratings, it may take a little while as most of them stay on your credit report for seven years.
Paying on time is the most important thing you can do because payment history is the most important factor in calculating your credit score. Start with any utility or credit account you have. You can also consider opening a secured credit card. It’s like a regular credit card, except you have to deposit a security deposit to open your account – often a few hundred dollars. Your credit limit will match your security deposit, and the regular payments you make will help build your payment history. If you later decide to close the account and you don’t have a balance, your card issuer will refund your deposit.
You should also aim to reduce your dependence on credit. Set up an emergency fund to cover unforeseen expenses so you don’t have to resort to a credit card or take out a loan. You should also try to use 30% or less of your credit limit each month. Using more than that tells lenders that you need a lot of credit to support your lifestyle and raises concerns about your financial stability.
Do not close old credit cards unless they charge you an annual fee, as this will reduce the average age of your account and avoid applying for new credit unless you are sure you are approved. Beyond that, you need to stick with it and trust that your efforts will pay off over time.