The Side Effects of Bad Credit

Bad credit can have many negative repercussions. If you're in the habit of paying your bills after the due date, late fees likely won't be your only problem. Poor borrowing habits erode your credit, which makes it a lot tougher to get loans in the future. They also can make it hard to get a cellphone contract or even land certain jobs. Here are just some of the possible consequences.

Bad Credit Means Trouble Getting a Loan

It probably doesn't come as a surprise that before handing you a new loan, banks want to know how likely you are to pay them back. One of the primary ways they make that assessment is by ordering your credit score through providers such as FICO and VantageScore. These credit-scoring models use information in your credit reports—from loan balances to payment histories—to assess your creditworthiness.

A low score can make it harder to borrow, whether it's a car loan, mortgage, or credit card account. And if you do qualify, you'll likely have to pay higher interest rates to make up for your great level of default risk. A lot of credit card issuers, for instance, require a credit score that's somewhere between “good” and “excellent”—that means a FICO score of at least 670 and a VantageScore of 700 or above.

If you’re looking to buy a home with a conventional loan, you'll need a FICO of at least 620. Borrowers can sometimes get an FHA mortgage with scores as low as 500, although you would put down at least 10% and have to pay mortgage insurance, which will increase your overall borrowing costs.

If your credit is less than stellar and you face a financial emergency, you may need to borrow money in a hurry to help you weather the situation. While credit problems complicate the process of securing an emergency loan, you may still be able to access a variety of emergency loan options.

Fewer Renting Options

Home buyers aren't the only ones who have to worry about a spotty credit history. It can come back to haunt you when trying to rent, as well. As with banks, landlords like to size up your ability to pay them on time before handing over the keys to a property. Therefore, they'll typically obtain your credit report as part of the application process.

If you've made some borrowing blunders in the past, getting a new place can be tough going. There are some ways around bad credit—you can get a cosigner or offer to pay a higher security deposit, for instance—but it's much easier to go in with a respectable score.

A good credit history can matter just as much for older adults as for younger ones. Medicare doesn't typically pay for long stays at a nursing home or an assisted living center, so these establishments rely on private payments. They often run a credit check before making an admission to make sure that an applicant can pay the bill.

Higher Insurance Costs

Here's something a lot of consumers don't anticipate when they rack up a big credit card bill or fall behind on their mortgage: paying higher auto insurance premiums. And yet that's exactly what happens with some insurance carriers (although some states prohibit the practice).

If you're wondering why that's the case, it's because of research showing a correlation between poor credit scores and the likelihood that drivers will file a claim through their auto insurance carrier. The worse your credit, the greater the odds you'll be at fault in an accident. A 2019 report by The Zebra, an insurance comparison site, found that drivers with poor scores paid more than twice as much as those with exceptional scores.

Other types of insurers may also be taking a look at your credit reports. For example, some renter's and homeowner's policies use a proprietary credit-scoring system to determine your rates. While life insurance companies don't typically use credit scores in the underwriting process, it may be harder to get a policy or obtain their best rates if you've had a recent bankruptcy.

Paying a Deposit for Utilities

Bad credit is often a hurdle when trying to set up an account with a utility or an internet company. Customers with lower credit scores may have to pay a deposit before signing up, which acts as insurance should you fail to pay your bill.

Even establishing service with a cellphone provider can get a little trickier if you can't show a good borrowing history. Some require users with lower credit scores to use a prepaid plan or put down a deposit. You may also have trouble qualifying for the best deals on more-sought-after phones.

Difficulty Landing a Job

The next time you interview for a job, your potential employer may not only ask for a list of references but also permission to run a credit check. Why? For certain roles—including management positions and jobs that involve handling money—companies want to know that the person they're hiring can be trusted when making financial decisions.

According to a 2016 CareerBuilder survey, 72% of employers said they run a background check on every new hire, and, of those, 29% run the candidate's credit as part of the evaluation process. Letting your credit score languish may not only cost you money in the form of expensive loans. It may also limit your ability to earn money.

The Bottom Line

A poor credit history can have wider-ranging consequences than you might think. Not only will a spotty credit report lead to higher interest rates and fewer loan options; it can also make it harder to find housing and acquire certain services. In some cases it can count against you in a job hunt. If it's been a while since you took a peak at your credit report, it might be a good time to see where you stand.