The 3 biggest downsides of bad credit
Real EstateIdeally, all the decisions we make in life involve considering both the pros and cons of possible outcomes. For example, the decision to eat a piece of chicken after its expiration date should be based not only on the possibility of a tasty dinner, but also on the possibility of an unpleasant gastrointestinal reaction.
In other words, most things in life have advantages and disadvantages, and our actions should be based, but not always, on whether the advantages outweigh the disadvantages. While many bad decisions can occur as a result of failure to consider the downsides, just as many bad decisions are the result of a lack of understanding of the downsides, rather than not considering them at all.
Most people know that irresponsible financial behaviors can give you a bad credit score, for example, but many people tend to underestimate the many disadvantages of having bad credit. To help you put things in perspective for your next financial decision, here are three of the biggest downsides to having bad credit.
1. You have a high probability of being rejected for a new loan
At its core, having bad credit is basically like walking around with a sign that says, “I can’t handle debt.” At least, this is how most creditors are going to interpret your bad credit history and low credit score when it comes to applying for a line of credit.
This is because lenders use your credit reports and scores as a means of determining your credit risk, or how likely you are to repay what you borrowed. Therefore, if you have a history of defaulting or defaulting on debt, the lenders will not want to give you more money and will reject your application for new credit.
Think of it this way: If you loan your neighbor your lawn mower in June but never return it, how likely is it that he or she will loan you your snow blower in December?
Since most major banks have a fairly low tolerance for risk, consumers with bad credit have limited options for finding a credit card or loan. That is, you’ll see lists of high-risk lenders who specialize in high-risk, bad credit applicants – lenders who aren’t exactly known for their affordability or top-notch rewards. Which brings us to the next big downside to bad credit: expenses.
2. Creditors, Homeowners, and Utilities Will Charge You More
It took a few tries, but you finally found a subprime lender who will work with you. Great, the hard part is over, right? Incorrect. Lest you think that qualifying for new credit is the only big downside to having bad credit, just look at how much that credit will cost you.
As we mentioned, your credit score is what lenders use to determine your credit risk. High-risk applicants are the most likely to default on their debt (not pay it off), so lenders willing to work with consumers with bad credit have to find some way to balance the risk. They do this by increasing interest rates and adding additional fees.
As an example, consider a loan of $ 10,000 because it pays off in three years. Applicant A, who has an excellent credit score of 750, will likely be offered an APR of around 3.5%, which means that Applicant A will pay around $ 550 in interest over the three years.
At the same time, Applicant B, who has a low credit score of 580, had to use a subprime lender to obtain a car loan of the same size. The subprime lender charged Applicant B a 10% APR, which means that Applicant B will pay more than $ 1,600 in interest over three years.
What’s worse, it’s not just the lenders and credit card issuers who will charge you the most for bad credit. You are likely to face a credit check when applying for a new apartment or when setting up utilities in a new location, and having bad credit can result in being charged a larger security deposit than you would otherwise. would have to provide.
3. You may miss out on valuable financial opportunities.
An important part of finance and accounting, opportunity cost is basically considering what you are missing out on when making the decision to do something else. For example, if you choose to spend your last $ 5 on a fancy coffee, your opportunity cost might be that $ 5 burger that you can’t eat later.
When it comes to your credit, having bad credit is fraught with opportunity costs. Take credit cards, for example. With bad credit, you’re stuck using high-risk or secured credit cards that probably cost a lot without offering much. In contrast, if you had good credit, you could earn hundreds of dollars in credit card rewards and benefits each year just by using the correct credit card.
And it goes beyond credit cards. Drivers with good credit can get dealer incentives when they buy a new car, and you can even get discounts on insurance for having a healthy credit profile.
Don’t forget the extra money you will probably have to provide when renting a new apartment. Let’s say you have to make a $ 1,000 security deposit when you move out due to bad credit. That money could easily pay off in your retirement account if it wasn’t wasted in the owner’s bank account.
Don’t let bad credit stop you
Although it’s our own decisions that often lead to bad credit, few of us actively choose to sink our credit scores. You can end up with bad credit as a result of a series of seemingly minor decisions that are made without considering the consequences. However, it is hoped that knowing these three main disadvantages of bad credit will help you gain perspective when making your next financial decision, big or small.
For consumers who already have credit problems, these disadvantages are likely to be day-to-day considerations. But they don’t have to be lifelong obstacles. You can rebuild bad credit over time by practicing responsible credit habits. You can also use credit repair to eliminate any mistakes or unsubstantiated bills that lower your score.
The most important rule of thumb for building credit is always, always, always pay your bills on time. Your payment history is worth up to 35% of your credit score, and late payments can cause you to lose dozens of points with a single mistake. You’ll also want to make sure you keep credit card balances low and borrow only what you can afford as agreed.
With time and diligence, even the worst credit can be rebuilt, freeing you from the many disadvantages of having bad credit. Even better, having good credit has many advantages that will make the hard work worth it.