Poor credit can have a big effect on many aspects of your financial life. Sometimes, it is an unavoidable consequence of bad luck, but in other cases, it happens because of poor decision-making and/or a lack of education on money management. Here are some of the ways that bad credit scores can cause problems.
Higher Interest Rates
One of the biggest impacts of having a low credit score is that you will pay much higher interest rates on loans and credit cards. Lenders view those with poor credit as higher risk, so they charge more in interest to compensate. For example, on a £10,000 personal loan, those with bad credit may pay 15-30% interest, versus 5-10% for those with good credit. This can cost thousands more in interest charges over the lifetime of the loan.
Difficulty Getting Approved
Lenders are much less likely to approve those with low credit scores for loans and credit cards. They want to mitigate their risk, so if your credit history shows missed payments or defaults, you may struggle to get approved for financing you need. Even if you are approved, you will likely get lower credit limits than those with better credit. This makes it harder to get the necessary credit to make big purchases like a car or home.
Thankfully, there are specialist lenders that offer products like finance for bad credit, so a big ticket purchase is still affordable.
Problems Renting a Flat
Most landlords and letting agents check the credit reports of rental applicants. If you have a history of missed payments or other negative marks, you may find it very difficult to get approved to rent a flat. Landlords want tenants they view as reliable, so bad credit works against you during the rental application process. Some may require larger security deposits from tenants with poor credit.
Higher Insurance Costs
Insurers also use credit reports as a factor in setting premiums. Those with poor credit often pay higher rates for auto, home, life and other insurance policies. Insurers correlate bad credit with higher risk of claims. Expect to pay more for insurance across the board until you improve your credit score. This makes finances even tighter.
Difficulty Finding Employment
Employers frequently check credit reports, especially for jobs involving financial responsibility. Bad credit can make it harder to get hired if an employer sees your credit history as a negative reflection on your character or responsibility. Poor credit may limit your job prospects, making it harder to earn more income to pay off debts.
Feeling Trapped
All of these impacts combined can make you feel trapped in a cycle of bad credit. When you can’t get approved for credit, loans, housing and jobs, it’s very hard to get back on your feet financially. This constant struggle can take a major toll on your stress levels and mental health. Breaking the cycle of bad credit is key to moving forward.
The effects of poor credit seep into many areas of life, making everything more difficult financially. Taking steps to improve your credit score should be a top priority to avoid these problems.