How bad credit affects you

Your credit score may look like a harmless three-digit number, but don’t be fooled. A good credit score can be your ticket to the best interest rates whenever you borrow money. A bad credit score, on the other hand, can hurt you in many different ways.

Your credit score is a number between 300 and 850, with the national average coming in around 675. It’s designed to reflect how likely you are to pay back loans on time. A high score (720 or above) indicates a history of handling debt responsibly by making payments on time and not overextending yourself. Lower scores suggest that you have had difficulties doing these things in the past, so lenders consider you a greater risk.

Here are some of the areas where bad credit can affect you:

Mortgages

If you have a credit score of 720 and above, you will likely be able to receive a lender’s best rate on a mortgage or home equity loan.

​Between 675 and 719 you could end up having to pay up to half a percentage more than someone in the top category.

Between 620 and 674, you may need to provide more documentation than those with higher scores and could end up paying as much as 2 percent more than borrowers with excellent credit.

Below 620 you’re considered “sub-prime” meaning that you are considered to have less-than-perfect credit and it may be more difficult for you to find a lender. You could also be charged rates up to 3.5 percent higher than a lender’s best rate, which could mean tens of thousands of dollars in additional interest over the life of your mortgage.

Car Loans

Auto loans are directly impacted by your credit score. The better your score, the better your interest rate. And although you can get an auto loan with bad credit, the interest rate will probably be outrageous.

Credit cards

It’s almost impossible to do without a credit card in today’s economy. Unfortunately, credit cards often carry relatively high interest rates (18 percent is not uncommon). In order to qualify for the best credit cards, you'll need a high credit score. Cards issued by financial institutions, however, may offer a scale of rates for different cardholders. If you have excellent credit, you can often get a major credit card with a rate of less than 10 percent. With a poor score, however, you may be stuck with a rate that’s twice as high. Plus, the overall amount of credit that you qualify for is likely to be less the lower your score.

Consumer loans

Bad credit will likely result in your paying a higher rate for your personal loan, unsecured line of credit and most other types of consumer loans. There are too many variables here to provide exact numbers, but the above guidelines for mortgages demonstrate how interest rates can increase for people with low credit scores.

Refinancing

One of the primary reasons people choose to refinance is to get a better interest rate, or to lower their payment. So when it comes time to refinance your mortgage or car loan, a low credit score can impact your ability to get a good rate, or your ability to refinance at all.

Insurance

Insurance companies in many states use credit scores to help them set your homeowner and auto premiums. They argue that people with low credit scores are statistically more likely to make claims, so no matter how careful you may be behind the wheel or in your home, bad credit may result in your having to pay more than other people with similar vehicles and property.

Employment

Under U.S. law, prospective employers are generally allowed to investigate your credit report in order to help decide whether or not to hire you for a particular position. Laws vary by state but, in general, they are required to obtain your written consent in order to do this. While you may refuse, there is always the chance you may not be hired. Obviously, a low score could potentially be an obstacle to getting a job.

Other areas

A poor credit score can affect other areas of your life that you’ve probably never considered. For example, landlords can check your score (with your consent) before renting an apartment, and utility companies may require customers with bad credit to pay a deposit when opening a new account.

You can’t repair bad credit overnight, but you can gradually improve your score if you commit to changing your borrowing habits. The long-term financial payoff that you receive will make it well worthwhile.

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