by Maurie Backman | March 19, 2019
You've probably heard that it's important to keep your credit score as high as possible. If you don't, you may not get approved for the next credit card you want, or you may get approved with a lower credit limit and a higher interest rate than you'd like.
The truth, however, is that having bad credit won't just cramp your spending style -- it might also prevent you from doing some of the things functional adults take for granted.
What's considered a bad credit score? First, know this: That number can range from 300 to 850, so the closer you get to the bottom end of that range, the worse shape you're in. Generally speaking, a score of 700 or above is considered "good" or "excellent," while 650 to 699 is considered "fair." On the other hand, a score of 600 to 649 is considered "poor," while anything below 600 is, well, pretty much abysmal.
Now that that's out of the way, here are a few risks you run when you let your credit drop into unfavorable territory.
Mortgage lenders are only willing to take on so much risk. If your credit score is in the dumps, you can expect to have a harder time buying a home. You may find that you're unable to qualify for a mortgage because of your score, and if you are approved, the lender may offer a rate that makes borrowing prohibitively expensive.
Say you've got a great credit score of 760 or above. You might qualify for a 4.097% APR on a $200,000 mortgage, which translates into a monthly payment of $966. With a score of 640, however, you may be looking at a 5.14% APR and a monthly payment of $1,091 for the same loan. And with a score of 620, you can expect an APR around 5.686%, or a monthly payment of $1,159.
Many of us need vehicles to get to our jobs, but if your credit score is poor, good luck getting an affordable auto loan to finance that purchase. Even if you manage to qualify, as is the case with a mortgage, you may get stuck with a high rate. myAutoloan.com, for example, is currently offering car loans at an APR ranging from 2.74% for folks with excellent credit to 27% for those with bad credit. That's quite the spread.
If you take out a $15,000 car loan at an APR of 2.74% and pay it off over five years, it'll cost you $268 a month. At a 27% APR, it'll cost you $458 a month.
Landlords want tenants who are likely to keep up with their scheduled rent payments. If your credit is poor, it might lead a landlord to question your ability to consistently make rent, and you may be denied a home as a result. If you manage to snag a lease despite your bad credit, you may be forced to put down a larger security deposit than usual to compensate.
Believe it or not, cellphone companies won't sign just anybody up for a wireless plan. You'll need decent credit for a standard cellphone contract; otherwise, you may have no choice but to get a prepaid cellphone or sign a month-to-month contract, which will typically be more expensive than a standard one.
Believe it or not, some jobs require you to have decent credit, and it's not illegal for employers to turn you down because of a bad credit score. Some employers may look at your credit score as a reflection of your responsibility -- especially if the job you're applying for requires you to handle or manage money.
If your credit is in bad shape, there are steps you can take to improve your financial picture and avoid the aforementioned repercussions. First, pay all of your bills on time going forward. If you can't pay your credit cards in full, come up with those minimum payments by their respective deadlines. Doing so will help bring up your payment history, which is the single most important factor in determining your credit score.
Next, work on paying down some of your existing debt. This will bring down your credit utilization ratio, or the percentage of your available credit that you're using, which is the second-most influential factor in your score.
At the same time, don't take on new expenses if you're currently in debt or have poor credit. That would increase your likelihood of missing a bill and digging yourself deeper into a hole.
Building some savings will also help you avoid credit issues. The more money you have to fall back on, the less likely you'll be to charge an expense and have it damage your score down the line.
Clearly, bad credit is bad news, so if your score needs improving, make it a priority. Otherwise, you may struggle financially for months or years to come.
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