Simply put, one's credit score is an "average" of how good or bad one is with money. Life can be more challenging and expensive if one has a bad credit score.
A bad (relatively poor) credit score can have far-reaching consequences. While this has been said enough, before listing the side effects of a poor credit score, let's try to answer the burning question: "What is considered a bad credit score?" Worry not; we've defined it for you below.
According to the FICO Score (300 to 850 and one of the most famous scores lenders use), a bad credit score falls below 670. A score between 580 and 669 is considered fair, and one between 300 and 579 is poor. The table below lists all the scores and their definitions.
Now that we know what is considered a bad credit score and a good credit score let's move on to understand how a bad score can affect us in ways we probably didn't think of.
To begin with, the most important factors that get into jeopardy are home loans, auto loans, and insurance premiums. Sounds bizarre. But not really. Here's why:
Getting home loans and auto loans becomes impossible and super expensive too
Lower your score, lower is the likeliness of getting a co-signer and a willing lender. Many loan providers in the US have set levers against which they determine the approvals of loans and credit to potential borrowers. But your credit score directly affects your loan chances. If your score is higher, a lender finds it easier to trust you. For them, it's a matter of whether you'll pay back on time or ever. Suppose a score of 697 is similar to 705 - but if 700 is the borrowing cut-off lever for a lender, the 8 points can make a lot of difference in approvals.
If getting a loan is a win for you in the US, wait until you know your interest rates.
A bad credit score truly affects the interest rates on your loans. If you have a bad credit score, you pay a much higher rate than someone with an excellent credit score. This holds across the loan spectrum of auto loans, home loans, personal loans, and new credit cards.
To give you a better context, here's a quick comparison:
High Insurance Cost
They say if you want to live a good life, you've got to have good credit. Many things affect your insurance premium rate, but one not-so-common, bizarre factor is your credit history.
This correlation between insurance premiums and credit score might seem unusual, but it exists. The better your score, the lower the rate you'll pay; the worse your score, the higher your rate will be. However, insurance companies don't rely solely on your credit score when determining a premium rate. While this is a rare practice in all the states in the US, insurance providers keep a comprehensive eye on when they receive applications from individuals with a low credit score.
Renting a house
If you think that the only ones who need to worry about bad credit are people looking to buy houses (because of home loan interest rates), think again! Bad credit hurts you even when you want to rent out a house. That's true!
Landlords, very similar to banks, look at the ability of potential tenants to pay the rent on time. Therefore, they'll usually ask to see your credit reports as part of the application process. Does that mean you'll never be able to rent a house? Maybe not. It means it will get much more difficult if you have a bad credit score. There are hacks and workarounds where you can bring in a co-signer or pay a higher security deposit - but you'd instead go in with a much more respectable score. Isn't it?
Utilities become more expensive when you have a poor credit score. Yes - your internet, gas, cable, and cell phone contracts. And while it feels like it's unfair to you, it holds fair for the utility provider.
Technically, when the utility company gives you a service, they set up an account in your name. Let's say Lauren subscribes to an X internet plan from a Y service provider. Simply put, the Y service provider has opened up an account in Lauren's name and is granting her a line of credit that's supposed to be paid in full every month. Along with this, Y also charges Lauren a security deposit as part of the application process.
If one has a bad credit history, one might have to pay a premium on the security deposit, sometimes - as much as several hundred dollars, to establish service in one's name. These fees are charged upfront, making it challenging to start a new service.
Believe it or not: Your credit history may determine if you get your dream job. Some employers in the US, if not all, look at your credit history when deciding whether to give you a job. They may not hire you if they see red flags on your credit report, including high debt amounts, bankruptcy, or outstanding bills.
Keep in mind: When employers look at your credit report, they won't be able to see or review it like a lender or a bank views it. They can access a limited version of your credit report to see only what they require.
Limited Credit Card Options
A low credit score can be a drag when looking for the right credit card. If your credit score is higher, it will be easier to find a great credit card with some delightful perks (who knows, even free hotel stays! If you're in this situation, you might get stuck with some pretty nasty interest rates.
Over and above these, other side effects of having a bad score include:
- Difficulty in starting up a new business.
- The potential strain on personal-life relationships
At the end of this, if you want to course correct and create a better credit score, start by using money responsibly. That's one way to start. Whether you have been in the US for a while or just moved there, here's what you can do to build a good credit score.