Most Americans today have decent or better credit, but getting there may be difficult. CNBC Select explains the eight major problems of poor credit ConsolidationNow and how to overcome them.
A strong credit score allows you to get better credit cards, loans, and interest rates.
You’ll lose out on these bargains if your credit score is below 600, and you’ll pay considerably higher interest rates on credit cards, loans, and mortgages if your score is below 300.
A low credit score may make living difficult and even postpone retirement by increasing costs. But boosting your credit score takes more than chance, and it requires an awareness of how much your credit score affects your life.
Below, CNBC Select talks to financial expert John Ulzheimer, formerly of FICO and Equifax, on the drawbacks of bad credit. Plus, he reveals the first step to regaining good credit.
1. Mainstream lenders deem you too risky.
Because banks like Citi, Bank of America, and Discover have strict lending criteria, you may not qualify for typical loans or credit cards if you have terrible credit.
Bad credit limits or eliminates access to mainstream finance, Ulzheimer tells CNBC Select.
Ulzheimer advises reading the tiny print before taking out a payday loan, pawn shop or title loan.
Payday loans, for example, are a quick method to receive cash when you need it, but the APR may be as high as 400% to 700%. Ulzheimer advises avoiding them.
“Reading the documents and agreements will make it very evident that the mainstream lender will offer you a better deal – that’s simple mathematics,” he explains.
2. Your loan costs more
A strong credit score not only helps you bank with more trustworthy organizations, but also gets you the best loan rates.
Ulzheimer says clients obtain the greatest APR offers on car loans and mortgages with scores of 720 or higher.
Consider a 620 FICO score for a mortgage application. With current rates, a $300,000 home would cost about 4.8 percent, while a buyer with a score between 760 and 850 would spend around 3.2 percent.
A 1.6 percent difference may not seem like much, but it adds up to $99,000 over the course of a 30-year mortgage.
3. Insurance prices may rise
Most US states allow credit-based insurance scoring, allowing insurers to include your financial habits into their risk assessment.
Your premium won’t go up if your credit score drops below 600, nor will your policy be cancelled. However, poor credit may hinder you from receiving the best rate. You may get your credit-based insurance score from LexisNexis.
(Note: In Hawaii and Maryland, credit-based vehicle insurance scoring is prohibited. Massachusetts and California have outlawed it.)
4. It’s possible you’ll lose out on job
Good credit habits lead to higher employment prospects. Most states enable businesses to access consumer credit data for recruiting, promoting, or reassigning employees. (This is especially true if the work involves a lot of money.)
With your signed consent, your employer may examine your credit report and see information including open credit lines, balances, car loans, student loans, prior foreclosures, late or missing payments, bankruptcies, and collections sums.
5. It will be tougher to rent an apartment
Experian says a credit score of 620 is generally required to qualify for an apartment.
Some landlords and property management organizations are harsher than others, but a credit score of 700 or above can help. With bad credit, you may need a cosigner or pay a security deposit before signing a new lease. Renting an apartment with negative credit isn’t impossible, but it’s difficult.
6. Utilities, including internet, will be more difficult.
“Utility providers might impose deposits if you have bad credit,” He explains. I don’t know any utilities that will provide you a service without a background check.
Some states protect you against losing access to public services including water, electricity, gas, and heat (see the Low-Income Home Energy Assistance Program’s website for state-by-state laws).
Also, if you are refused utility service due to bad credit, you may be able to pay a deposit or submit a letter of guarantee, which functions as an agreement between you and the utility company if you fall behind on your obligations.
Even though the United Nations currently considers access to the internet a human right, non-public utilities like internet and cable have less legal safeguards.
7. No top rewards credit cards
The greatest rewards cards demand excellent credit. You can get the finest introductory deals and cash-back incentives available today if your credit score is outstanding or exceptional.
Some premium credit cards also provide unique access to concert and event pre-sales, as well as cash back on streaming services.
The Capital One® Savor® Cash Rewards Credit Card is one of CNBC Select’s best cash-back cards for sports fans, movie aficionados, and adventurers. It gives 4% cash back on eating and entertainment, 3% on groceries, and 1% on all other purchases. New cards may get a $300 bonus after spending $3,000 in the first three months.
8. You put off saving and even retirement.
Bad credit might also have long-term financial consequences. If you have high-interest credit card debt, you can’t save enough money for the future to offset your APR costs.
When interest rates are high, you invest less in equity and assets and more in debt payments. Undeniably, debt offers no return on investment; interest is money lost forever.
Consider a balance transfer credit card with a 0% intro APR, like the Aspire Platinum Mastercard®. A balance transfer card may assist reduce interest payments on current debt. As your debt-to-credit ratio decreases, your credit score should increase, allowing you to refinance your home or vehicle loan and save money on interest.
How to stop negative credit cycle?
“You probably know if you have bad credit,” says Ulzheimer. “Not going to be astonished if you checked your credit and discovered overdue and defaulted accounts,” he says.
The major reason individuals with terrible credit don’t raise their scores is because they’re stuck in a loop.
“If you mess up a pizza, you can toss it away and make another,” Ulzheimer advises. But credit is self-policing and punishing.”
In other words, starting again isn’t simple. Delinquencies (more than 30 days late) remain on your credit record for seven years.
And unless you keep “resetting the clock” by missing payments, Ulzheimer says, seven years is hardly a life sentence.
Debt relief options
“Hit the reset button,” urges Ulzheimer, to halt the debt cycle.
This might include talking to a credit counselor, hiring a debt lawyer, declaring bankruptcy, or even avoiding credit for many years.
“You may need to take a break,” adds Ulzheimer, which may involve putting away your credit cards.
“Expect punitive terms” if you get one of CNBC Select’s finest credit cards for weak credit. The card may include an annual charge (with no benefits), a higher-than-average APR, or even a $200 security deposit (like the Discover it® Secured Credit Card).
Improve your credit score for the future
A bad credit score may be improved. Delinquencies go disappear after seven years and Chapter 7 bankruptcy after 10 years.
Your credit score may naturally improve if you avoid taking on new debt and pay your obligations on time. Making the minimal payment each month can assist improve your payment history and reduce your debt-to-credit ratio.
In the interim, you may read about the most frequent credit card blunders and how to adhere to your terms and conditions.
According to Ulzheimer, many consumers assume that if they pay close to the minimum amount, or miss the due date by just a few days, they won’t be punished.
“But if you can get out of this mindset, you will see a higher score one day. You are normally just seven years away from fantastic credit.”