The Cost of Bad Credit
The cost of bad credit will continue to haunt your finance in a number for ways.
Find out where you may be paying extra, plus discover tips on how to improve your credit.
Although ignoring a bad credit score is pretty easy to do, it does come with some serious consequences. Realistically, you could end up spending a lot of unnecessary money in areas throughout your life simply because of that low score. The first step to fixing the problem is to understand exactly how much bad credit is costing you. From higher interest rates to bigger insurance premiums, you’ll discover hidden expenses in all sorts of areas of life.
The cost of bad credit, plus a few ways how to fix it.
Loan and Credit Card APR
The most obvious cost of bad credit is in the form of high interest rates. Not only are you much less likely to get approved for new loans or credit cards, but you’ll also still pay more if your application is accepted. You’ll have a much higher APR, which makes it more expensive to carry a balance. A sudden drop in your credit score can also cause your current credit card APR to increase since card companies intermittently run credit checks on existing customers. You may receive a notice that any new charges will be subject to the higher rate.
Limited Access to Financing
It’s difficult to get approved for traditional loans when your credit score is below average. Whether you need a personal loan for a financial emergency or want to apply for a new credit card, you’ll have a harder time working with reputable lenders or qualifying for favorable terms.
Lower Cash on Hand
The cost of bad credit also extends to when you’re trying to keep up with large minimum payments on your credit cards. Not only are you continually accumulating interest when you carry a credit card balance, but you’re also hurting your monthly budget.
A lack of cash flow may hinder your ability to pay other bills on time, which could result in late fees. Even if you can pay your bills on time, you may not be able to save as aggressively as you’d like to. The next time you face a financial emergency, you could have limited options if your extra cash has gone towards high credit card payments instead of your savings account.
Costly Insurance Premiums
It may surprise you to discover that the cost of bad credit extends to insurance companies, but they typically run a credit check before issuing a policy. The reason is that research shows that lower credit drivers tend to file more claims than those with higher credit. As a result, you’ll pay a higher premium for auto insurance when you have bad credit.Saving money on your car insurance may be more attainable than you think when working on your credit score. Increasing your credit score by just one tier can save you 17% on your auto insurance premium.
Harder Time Buying a House
Your credit score plays an important part in both buying a house and renting an apartment. When you’re house hunting, your lender checks your score to approve your application and determine your rate. And if you’re applying for an FHA mortgage, having a low credit score could require you to come up with a larger down payment.
Rental applications also include a credit check and yours could be passed over when competing against other applicants with higher credit scores. Even if you are chosen, your landlord could make you pay a larger security deposit to offset the risk of missed rent payments. Ultimately, that means less cash in the bank for you.
Can’t Get a Job
Some employers also require a certain credit score as part of the screening process. Any company in the finance, law enforcement, or government fields is likely to run a credit check. And employers in any field are more likely to check your score as you climb the corporate ladder for management positions. Having a bad score could limit your job growth, and consequently, your long-term earning potential. Who would have ever thought the cost of bad credit would be your future employment?
How to Fix Bad Credit
Make Timely Payments
Did you know that your payment history is the largest contributing factor to your credit score? That makes it essential to pay every bill on time each month. If you have to, set up calendar reminders or schedule automatic payments to help yourself remember those due dates. Late payments also cause more damage to your credit score the longer they go unpaid. If you have current overdue balances, make a payment right away to bring your account current.
Credit Builder Loans
Some banks and credit unions offer credit builder loans, which are designed to contribute positive payments to your credit report. It’s not entirely borrower-friendly in that you don’t get access to the funds until you’ve paid off the loan entirely. Plus, you’ll still be charged interest, so there is a cost associated with this strategy.
Self.inc is a good choice if you’re looking for a credit builder loan. They make the process simple. You can start by paying as little as $25 a month, with a term length that works best for you. Each on-time monthly payment that you make builds your credit history and adds to your savings. At the end of the term length, you’ll have a loan already paid for!
Secured Credit Cards
A secured credit card is another way to build your credit score by making on-time payments. In order to open a card, you typically need to make a deposit that equals your credit limit. So if the card has a $500 line of credit, you would deposit $500 to the creditor. You’ll eventually get that money back once you establish a positive payment history and meet the requirements to bump up to a better card. You can also charge purchases to the credit card just like a normal credit card. But if you don’t pay off the full balance, you’ll still be charged interest.
OpenSky® makes a secured credit card that is designed specifically for people with bad credit. In fact, there’s not even a credit check as part of the application process. Since you’ll need to make a refundable deposit, you can choose your own credit limit, ranging anywhere between $200 and $3,000. That gives you more flexibility than other cards that come with a predetermined deposit and credit limit.
Have Emergency Savings
Keeping more money in the bank doesn’t directly reduce the cost of bad credit, but it does set you up for financial success, and that definitely impacts your score. An emergency savings account gives you a safety net that helps you avoid getting backed into a corner later on. When a sudden expense pops up, you won’t have to charge it on your credit card or seek out high-risk financing like payday loans. Start with a $500 goal for your emergency savings, then try to save enough to cover at least three to six months of expenses. Anytime you dip into your savings account, replenish the funds as soon as you can.
Become Authorized User
You can have a close friend or family member add you as an authorized user on one of their credit cards, but this strategy does come with some risks. The benefit is that any positive activity associated with that account is added to your credit report. That includes on-time payments, low balances, and a longer credit history.
The Real Deal
As you consider whether to hire Credit Repair Express to assist you with your credit needs, it is important to look at the price you are already paying for having a low credit score. A low credit score hurts your ability to get loans and raises the cost of credit when you can get it. Credit scores are also looked at for insurance rates, renting, and even employment. Without getting your negative credit history managed by us to raise your score, chances are you’re already overpaying for just about everything.