What does a low or poor credit score can really mean to you…
1. Higher Interest Rates
Your credit cards, car loans and mortgage will all carry higher interest rates when your credit score is low. Unfortunately, lenders view a lower credit score as an indicator that you’re not a trustworthy borrower. In comparing loans and interest rates, borrowers a higher credit score have lower interest rates and are more likely to be approved. A higher interest rate is common when a borrower has a low credit score, as lenders can’t be sure that you’ll pay them back. In other words, you’re a bigger liability and risk for lenders.
However, your interest rates for different loans do not have a direct bearing on your credit score. However, having a higher interest rate means you’re paying more money out-of-pocket over time than someone with a higher credit score is paying. You’re literally paying more for the same service or product; lenders are also benefiting from your low credit score.
High interest rates over time will result in an increase in the balances of your account month to month. If you are paying the minimum monthly payment, for example, expect your interest rate to increase and your debt to develop. If your balance exceeds the recommended 30% utilization ratio, your credit score could drop even further as a result of a high balance.
2. High Car Insurance Premiums
Yes, even your car insurance premiums will be increased as a result of a poor credit score! Major insurance companies use a ton of data to determine your rates, such as zip code, driving record, and accident rate in your area. Some companies even offer deductions for things like club membership or student status. Did you know that they also penalize for low credit scores?
Your credit score is one of the many factors taken into account by insurance firms. Since there’s a connection between drivers with low credit filing claims at a higher rate, this correlation impacts hopeful drivers who happen to have lower credit scores!
In the same way that those who live in areas with a high number of break-ins, car jackings, or accidents pay a higher premium since they are at greater risk, so are innocent drivers with low credit scores penalized as a result of the statistic. Consider a higher risk to insure, you’ll pay more.
3. Renting or Buying Options
When you’re applying to rent an apartment or buy a house, lenders and landlords are reviewing your credit score to determine your credit trustworthiness. Lenders are also looking at your “rent-to-income” ratio. To secure your ability to rent or buy a home, experts suggest that your income should be 4x the monthly rent at a minimum.
Rent-to-income ratio and credit trustworthiness are two major factors of consideration when it comes to a potential landlord. Landlords or lenders want to know that you will be able to make a rent or mortgage payment. They use your rent-to-income ratio as an indicator. Additionally, they want to know that you’re reliable, based on your credit score. A lower credit score can prevent you from renting an apartment you really want, even if you can prove that you have the income to cover the monthly rent.
4. Credit Limits Low
Have you ever seen an offer from your credit card company, offering to increase your credit limit? Well, requesting an increase in your credit limit is one way to decrease your utilization ratio. However, there are a few things to consider before accepting the offer.
Increasing your credit limit increase offers so many advantages: to free your spending up, to show ability to manage debt and make payments, to reduce the chance of going over your limit. Lenders consider a few items before offering an increase, such as your income, your payment history, and your credit history, and your balance. Credit card companies may do a hard inquiry to make this determination, which can drop your credit score a few points. The hard inquiry will also stay on your credit report for up to two years.
If you are considering making a major purchase, this hard inquiry and its effect may not be worth the hassle.
5. Prohibit Employment
In many states, companies ask potential employees to acknowledge a background and credit check as part of the hiring process. Although your credit score is not something that most human resource managers search for, they are looking for warning signs and marks on your credit report that could indicate you would be unreliable as an employee. In the same way that lenders are search for trustworthiness, so are potential hirers. Your debt-to-income ratio and your financial history are two powerful indicators taken into hiring consideration.
Negative items on your credit report, whether late payments, debt, large medical debt balances, or even bankruptcy, can secretly prevent you from being hired. If you do have any unfair negative items on your credit report, you could have more rights than you might think. Speak with the credit consultants at Perry Draper Law for more information.
6. Damage Quality of Life
With a low credit score, you might find yourself in need of access to money when you don’t have a cash flow. It could be for a pet emergency, a medical bill, a car accident, or just to cover bills until your next pay check.
Many people lean credit cards, friends, or payday loans to make ends meet and cover these emergency expenses. It is a cycle that is hard to break, especially when the debt is seemly insurmountable. Stress, poor performance at work, an increase in sick days or time off are all signals of depression caused by life’s difficult circumstances.
As advocates of health and well-being, our law firm helps free people from their debt so they can enjoy life again free from burdens and hardships.
What to Do About It
Improving your credit score is a way to a better life, become more productive, and increase your self-esteem. With higher credit, you’re viewed as more financially trustworthy and therefore less of a risk to creditors and lenders. In a world that moves on credit, this is a vital step in developing financial freedom to choose what happens in your life.
No matter what your financial goals are, whether it’s taking a trip overseas, retiring by age 60, paying off your student loan debt, or starting a family, good credit will make the financial aspect a whole lot smoother and less expensive over time.
If you are struggling with low or poor credit, don’t give up! You can call and speak with credit consultants at Perry Draper Law, help establish a game plan, and discuss your path to improved credit. It is always worth the effort to improve your financial situation
What questions do you have about credit? Let us know in the comments below!