If you think that having a bad credit score is not that big of deal, you’re sadly mistaken. The consequences of having bad credit are far and wide. Below, you’ll learn about things such as higher fees, and the potential impact on your employment and marriage. After reading these tips, I think you’ll make and even bigger effort to take care of your credit.
Here are five punches that you can expect to be delivered to your financial mid-section if you don’t mind your credit.
1. Say Hello to Higher Fees
The Credit Card Accountability Responsibility and Disclosure Act of 2009, also known as the Credit CARD Act, was implemented to prevent credit card companies from charging you excessive fees.
(Note: Don’t you love how they practically twisted themselves into a pretzel trying to come up with the words that would spell CARD?)
Anyway, the Credit CARD Act is a positive and beneficial law. But that doesn’t mean you’re immune from racking up a pile of fees if you miss payments or go over your limit.
In addition, the act doesn’t cover fees associated with secured loans, such as those that are attached to your home and car. Start missing payments on these types of loans and you’re going to get hit with fees so large that you’ll swear someone must be making them up.
The fees go by names such as deficiency payments, legal fees, repo fees, etc. And when you can’t or don’t pay the fees, they’ll come and take your home and car. What’s worse is that your credit will sink further into the abyss.
2. Interest Rates on Steroids
To make my point about how bad credit can cause the interest rates you’ll be charged to rise, and thus the amount of extra money you’ll pay on loans, I decided to use an example.
I came across a recent mortgage interest rate chart that showed that if your FICO credit score fell within the range of 620-639, the rate you’d be charged on a 30-year home mortgage would be around 5.5%. On the other hand, if your score was between 760-850, you’d be looking at an interest rate of 3.9% for the same mortgage.
When you compare the two rates and subtract one from the other, the difference is 1.6%. Sounds like small potatoes, right? Well, let’s see what the dollar impact would be if you purchased a $300,000 home and provided a $50,000 down payment. So that means you would finance $250,000.
If you want to play along, just go to this handy dandy mortgage calculator.
The mortgage calculator will show that if you finance $250.000 at a 5.5% interest rate, your interest payments alone would total $257,572 over the 30 years.
And if you financed $250,000 at an interest rate of 3.9%, your total interest payments over the life of the loan would be $171,793.
So, the 1.6% difference between the two interest rates means that you would pay $85,779 more in interest on your higher rate mortgage. Yikes! That’s real money, citizen. Have I gotten your attention now?
And the higher interest rates for bad credit aren’t limited home mortgages. When other potential creditors review your credit file, they’ll charge you higher rates as well. Think about what that domino effect would mean financially over your lifetime.
3. No Job for You
Did you know that having bad credit could interfere with you getting a job or a promotion? It’s true because more and more employers are using credit scores to help gauge a potential employees reliability. And do you think you’re going to get promoted to a sensitive position if your credit score is in the tank? No way.
That’s because employers know there are probably plenty of other people who can do your job. So they simply won’t take a chance on someone who has questionable financial issues. The question in their mind will be, “What other bad things might going on with this person?”
4. If You Think Your Insurance Premiums Are Already High
You have to give insurance companies credit for trying every which way possible to get more of your money. Well, get this.
I read where they have now linked bad credit to health and longevity. In fact, there is such a thing as your “FICO Insurance Score”. Think I’m crazy? Read about it for yourself here…FICO Insurance Scores
Your FICO Insurance Score incorporates elements from your credit files and other aspects of your life. Basically, the score is intended to give the insurance company insight into the likelihood that you will file multiple claims. Loaded with this information, the insurer will establish whether or not to grant you insurance and how much to charge you in premiums.
Now, not all states allow your credit history to be used by insurance underwriters. But some do. So check with your state’s insurance insurance department if this concerns you.
5. Splitsville is Not a Nice Town
Money issues aren’t the number one cause of break ups and divorces, but they are on the list. It’s no fun to have your credit card denied when making a purchase. Denial of credit and financial problems can significantly impact someone’s confidence, image, and self-worth.
And usually the one who has to deal with the arguing and negativity of a bad financial situation is your spouse. This can be especially trying if there is an unwillingness to accept and deal with the problem.
Of course, one way to prevent financial issues from being the source of conflict in a marriage is to check the credit report of your potential spouse before you get hitched. You’ll quickly get a sense for whether they are frugal or have a spending problem.
But more importantly, it will give you both an opportunity to sit together before you get married and come to an agreement about saving and spending money. You can also establish financial goals that you both want to achieve.
So now you know five very big consequences of having bad credit. As discussed above, you run the risk of being subjected to higher fees and interest rates, missing out on job opportunities, paying higher insurance premiums, and putting your marriage at risk. But I suspect these things won’t happen to you because you now have a greater level of awareness, right?