Everyone takes their credit score for granted until they need a loan. But, the simple fact is there are things you can’t do with bad credit.
The debt-free crowd will tell you it doesn’t matter, that you should strive to pay off all debt and not use borrowed money. It’s easy to think you won’t have to worry about your credit score, but it’s not that simple.
Before you miss that payment, check out this list of things you can’t do with bad credit and get ahead of your credit problems.
Try Buying a House on Bad Credit
The lack of mortgage options for bad credit borrowers got so bad that the Federal Housing Administration (FHA) created a new program for people with poor credit scores. Borrowers with a credit score of 580 or higher on the FICO scale only need to come up with a 3.5% down payment.
Miss that credit score cutoff, though, and even the FHA requires a 10% down payment on your loan. The FHA also requires a debt-to-income ratio of less than 43%, meaning your monthly debt payments can’t be more than $4.30 for every $10 you make each month.
It’s a good program for bad credit borrowers, but there is still a huge problem. It does nothing for the interest rate you get on your bad credit mortgage. Even if you are approved for a mortgage, the bank will calculate a rate depending on your credit score.
Potential Landlords Will Check Your Credit
Ever wonder why you need your social security number on applications to rent a house or apartment?
It’s because landlords check your credit before they sign that rental agreement. Besides your credit score, they’re looking for how you pay your bills and how often you miss payments. Most potential landlords won’t come right out and tell you they are checking your credit or say they denied your application because of a bad credit score, but it happens all the time.
And because it is impossible to prove that you were denied a lease because of your credit, there is nothing you can do about it. Property management companies don’t want to take the risk that they will have to chase after tenants for rent so they won’t take a chance on you if your credit history isn’t stellar.
Want a Good Job? Get Good Credit First
Employers aren’t legally allowed to make a hiring decision on your credit score, but they can look at your credit report.
Potential employers are looking through your credit report to get a sense of your financial responsibility. If you’ve missed payments or haven’t followed through on your credit agreements, will you follow through with your responsibilities at work?
Like renting, most employers won’t come out and say they denied you an interview based on your credit report. It leaves them open to too many potential legal problems, so they will say they found someone more qualified.
A history of not making payments or bankruptcy can sink your chances, especially for management jobs and anything in finance. Even in jobs where you wouldn’t expect to care about your bad credit, employers won’t hire you if they think your money troubles could start causing problems at work.
Getting a Cell Phone Contract With Bad Credit or Not
Are you starting to see a trend? Basically, any time you sign a long-term contract that requires monthly payments, you probably will not be able to with bad credit.
The cell phone companies give juicy rebates to retailers like Best Buy and Walmart for those free or discounted phones you get when you sign up for a long-term contract. Verizon doesn’t want to be owed money if you don’t keep up with your monthly payments, so it isn’t likely to extend those sweet deals to people with bad credit.
You can still get a pay-as-you-go plan with poor credit but get ready to pay hundreds for that new smartphone.
Besides not giving you the best deal on contracts if you have bad credit, cable and other companies are allowed by the Federal Trade Commission to charge more for risk-based pricing. This will be an additional fee they charge because of your credit report. For example, sprint charges an additional $7.99 on this risk-based pricing, and other companies charge up to $15 extra monthly for this bad credit fee.
Your Bad Credit Will Cost You Higher Insurance Premiums
Insurance companies use a study from the 90s to justify charging more to people with bad credit. Nearly all auto insurers (95%) and 85% of homeowner insurers use what is called credit-based insurance scoring to determine your premiums.
According to the National Association of Insurance Commissioners (NAIC), insurance companies look at five areas in your credit report to calculate your credit-based insurance score.
- Payment History (40%) – How often do you make on-time payments
- Outstanding Debt (30%) – How much debt do you owe
- Credit History (15%) – The length of time you’ve had credit accounts
- New Credit (10%) – Applications for new loans you’ve made recently
- Credit Mix (5%) – The type of credit you owe, including mortgages, credit cards, car loans
These factors are similar to those used to calculate your credit score. However, insurers are not allowed to discriminate based on your credit score alone, so they’ve found a way around it by saying they look at the factors instead of your FICO score.
Either way, you won’t be getting the cheapest premiums on insurance with a subprime credit score. Worse still is that you are required by law to carry some types of insurance, so you really have no choice but to pay the higher bad credit fees.
As bad as all those financial things you can’t do with bad credit, there’s one more reason to protect your credit score.
What to Do if You Have Bad Credit
There are some ways to fight back against bad credit. Some work to increase your credit score within a month, while others will take a while.
First, you need to understand why you have bad credit and keep from making it worse. This means looking honestly at your credit report to see what’s on there, including late payments and loans that went to collections.
If you’re having trouble paying the bills, you need to do something to plug the gap fast. The more debts you get behind on, the worse your FICO score will get.
- Sell what you can to pay off debt
- Consider getting a side hustle to make extra money
- Get a debt consolidation loan to pay off the high-rate debt and lower your monthly payments
The good news is that bad credit isn’t forever. Monitoring your credit score and making on-time payments can help you improve your score in less than a year, and even people with bankruptcies can get approved for some loans within a couple of years so you can start investing your money. Try not to focus on what you can’t do with bad credit if you’ve already missed a few payments. Instead, do what needs to be done to fix your credit score and get out of the bad credit trap.
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This article was produced and syndicated by Wealth of Geeks.