- Respect your credit score and understand where the number comes from.
- Poor credit can lead you to losing travel rewards, your dream job, or even your identity.
- If you’re credit has dropped off, it’s not beyond saving.
Part Of Our Series On Tackling Your Scary Personal Finances
Almost as mysterious as the Bermuda Triangle, Bigfoot, and the Loch Ness Monster combined, is your credit score – the three-digit manifestation of your overall credit health.
I’m an amateur personal finance geek.
Your tools have helped me become a smarter investor.
Personal Capital Dashboard User, February 2021
Okay, maybe that first part is an exaggeration. Credit scores might be shrouded in mystery, but the system that agencies use to calculate them isn’t all that complicated.
Take the FICO scoring system, for example, which is commonly used by lenders and banks when evaluating creditworthiness. Individual scores are determined by considering these factors:
Seems easy enough to understand, right? Since the most important factors are payment history and the amount of money you owe (also known as your utilization rate), the smartest thing you can do is pay your bills on time and keep debt levels low.
Unfortunately, it appears that many Americans never got the memo on how to keep their credit healthy. As a recent study from Corporation for Enterprise Development points out, 56% of American consumers have “subprime” credit scores. A subprime score is considered anything below 640. While some of these consumers aren’t in a financial position to make the changes that will improve their scores, others just don’t care or don’t realized why good credit matters. The result? With a bad credit score, life becomes more expensive and complicated.
The 10 Scary Truths About Your Credit Score
Bad credit mucks up your life. So before it’s too late, consider these 10 scary credit truths:
1. Bad credit could compromise your shot at a new dream job.
Many people don’t know that when they apply and interview for a job, employers can, and often do, check credit of their applicants. As credit reporting agency Experian notes, federal law allows potential and current employers to see a modified version of your credit report with written consent. If you want to put your best foot forward when meeting a new potential employer, it’s good to make sure that your credit is in check, just in case.
2. 19 people fall victim to identity theft every minute worldwide.
Is there anything scarier than someone you don’t know impersonating to open new lines of credit, get into your bank accounts, and steal your money? According to the Federal Trade Commission, identity theft has reached epic proportions, with as many as 9.9 million confirmed cases each year.
And here’s the scary part: the average identity theft victim spends an estimated $500 and 30 hours to resolve each identity theft crime. Most cases of identity theft can be resolved if they’re caught early, but for those folks who don’t pay attention to their credit, the process is more involved – and a whole lot more expensive.
3. A low credit score adds up to $1,000’s more in interest.
No one wants to pay more money in interest than they have to, but that’s exactly what will happen if your credit score tanks.
Let’s compare two people who take out a car loan for $20,000. While one person has excellent credit and qualifies for 3.9% APR for 60 months, the other has bad credit and gets a loan with a 19% APR for 60 months. The result: The family with good credit will pay a total of $22,045.71 for their auto loan, while the family with bad credit has to shell out $31,128.66.
Now, that’s scary.
4. Bad credit means skyrocketing auto insurance rates, too.
Speaking of cars, did you know that bad credit affects your auto insurance rates, too? Many auto insurance companies believe there is a correlation between bad credit and an increased risk among drivers, so they take a peek at your credit report before figuring out what rate to offer.
The bottom line: Having bad credit means paying more – lots more – in monthly auto insurance premiums.
5. Your credit might even affect your ability to get a cell phone.
If you draw the line at paying higher insurance rates, consider this: many cell phone providers check your credit before offering you a monthly contract. And if your credit is bad enough, you might have to put down a deposit or ask a family member or friend to co-sign. Now, how embarrassing would that be?
Even scarier is the thought of having to buy one of those prepaid phones from Walmart. Yikes.
6. You can destroy your credit in weeks, but it takes years to rebuild.
A few late payments, a growing debt load, and an indifferent attitude are a lethal combination when it comes to your credit score. Here’s the truth: It only takes a moment to seriously damage your credit score, especially if you fall more than 90 days behind on a bill.
At that point, overdue bills become major delinquencies that won’t fall off your credit report for years, even after you pay them off.
7. Bad credit robs you of the best travel and cash-back rewards.
There are a lot of credit cards on the market that offer great rewards for their customers. Some of these offers let you earn points good for hotel stays or airfare, and others get you good, old-fashioned cash-back.
Sadly, rewards credit cards are generally only available to consumers who have good or excellent credit (generally considered a score of 720 or higher). Have bad credit? You’re out of luck when it comes to scoring free stuff via credit cards.
8. Bad credit can hurt your relationships.
If you think your odds of finding a soulmate are stacked against you already, consider this: a 2013 study from FreeCreditReport.com revealed that 30% of women and 20% of men stated they wouldn’t marry anyone with a low credit score. Further, most respondents to the survey admitted to believing that money management skills were as important as looks during the early stages of dating. Ouch.
9. Your credit score affect professional licensing.
Due to rule changes spurred by the Fair Credit Reporting Act, government agencies can use credit scores and reports to determine eligibility for professional licensing in certain occupations. This won’t affect individuals working in careers that aren’t highly regulated, but it spells grave misfortune for doctors, lawyers, CPAs, and financial professionals who have less-than-stellar credit.
Imagine how you would feel if you earned your degree and passed your licensing exam with flying colors only to find that you don’t qualify for licensure because of an old credit card you maxed out and forgot about. Scared yet? You should be.
10. Poor credit stands between you and your dream home.
With bad credit, your chance of qualifying for a mortgage or even renting an apartment plummets, unless you have tons of cash in the bank or a rich Aunt Edith who is just dying to cosign.
With a low credit score or a thin credit history, you may have to keep renting in perpetuity (if your credit is good enough to qualify for an apartment), or save monthly and improve your credit until you’re able to buy a home some time in the distant future.
Or, you could live in your mom’s basement.
Don’t Fear Your Credit Score, Do Something About It
If you think your credit score doesn’t matter, think again. No matter where you’re going in life or how you plan to get there, your credit score will come into play.
If your credit has taken a dive, it’s not too late to fix it. That means paying off as much debt as possible, paying off delinquent accounts, only opening new accounts when you absolutely have to, and making sure all of your bills are paid on time. Follow those steps, and your score will take care of itself over time.
The consequences of a bad credit score might seem dire, but you don’t have to be a victim. Instead of accepting them, go do something about it.