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Most of us don’t realize it or don’t want to think about it, but subscribing to dozens of credits and letting the credit mount is extremely damaging for our credit rating. If you are one of those people who think that a low credit score is nothing to be concerned about, then you had better think again. From my personal experience of working in the financial industry for over four years, if there is anything I have learned then that is: “Avoid low credit score like the plague!”
What’s so bad about a low credit score you might ask. Actually, there is nothing right about having a low credit score. In this article, I will share with you 5 reasons why you should avoid a low credit score. Sure, having multiple credit cards and high credit limits is an amazing experience. But, before you know it you will be maxing out on those credit cards and won’t be able to make the payments.
Many people may ask me why they can’t simply control the urge to max out on credit cards and overdraft limits. The thing is you may be able to control an urge when you know about it, but you can’t do much about if you are fooled into spending. That’s exactly what lenders are doing. They are using people’s gullibility and lack of knowledge to fool them into spending more and more.
What Does a Low Credit Score Mean for You?
FICO is the agency responsible for assigning credit scores. Their credit scores are in a range between 300 and 850. The lower the credit score the higher the credit risk an individual carries and vice versa.
Let’s start by answering the question: “what is a bad credit score?”
Even though there is no floor set on what is a low credit score, every lender defines their own. Also, every credit product has a different cut off credit score. Generally, a credit score of less than 600 would be considered tipping the scale towards the lower side. Hence, a low credit score will be considered as a bad credit score because it means that you are a higher credit risk to the lender.
First, let’s look at the 5 basic reasons a low credit score can cost you big time. Then we will move on to discussing how you can possibly avoid ending up in this situation.
5 Basic Reasons to Avoid Low Credit Score
1. Higher Interest Rates: A low credit score means that you are a higher risk to any lender. To buffer for that risk, the lender will charge you higher interest rates. It is a fact that lenders charge lower interest rates from individuals that have a high credit score. If you have a low credit score, you lose your bargaining position.
2. Difficult to Obtain More Credit: Just, for the same reason, lenders may also decide not to approve of your loan applications. All this depends on your credit default history as well. You might even have to resort to applying for payday loans online.
3. Rising Utility Costs: If you have persistently had low credit score in the past, utility companies may ask you to keep a security deposit. This is regardless of whether you have paid your past utility bills or not.
4. Employment Opportunities: Many companies check your credit history before hiring. A low credit score could mean that you won’t get the job that you had been awaiting for months.
5. Rising Insurance Premiums: Insurance companies also check credit before approving an insurance application. With a lower credit score, you will be charged a higher insurance premium because you are a higher risk.
Ways to Avoid Getting a Low Credit Score
If you genuinely want to do something about your credit situation, then you will need to take some serious steps. To avoid getting into this situation in the first place, you need to take the following precautionary steps:
- When your credit card companies encourage you to spend more on your credit card because it will increase your chances of earning a prize, remind yourself that you have to pay the bill for it too. Remember that your chances of winning the prize are slim anyway.
- A high credit limit should not mean that you need to utilize it. It is supposed to be something to use on a rainy day.
- Control your urges to spend. A good way to do so could be by reminding yourself of the ramifications of a low credit score.
Chris Holdheide is a Senior Reviewer at Stumble Forward. He has been working in financial services for more than four years and has helped families emerge from their worst financial nightmares. His goal is to help other people avoid making the same financial mistakes that he made. He lives in Midwest, Ohio with his wife and runs a small manufacturing business. For more help on low credit score, log on to http://stumbleforward.com.
Good post. Many don’t realize that a low credit score can affect you in many ways. While it may not seem fair to some, many employers and insurance companies might think differently of working with you, as you say. For my wife and I having a high score allowed us to save quite a bit in terms of our mortgage payment.
John S @ Frugal Rules recently posted..Blogging Tips From a Beginner
Good mortgages rates and credit cards are often the two things that are often associated with credit scores but it can affect so much more. When you think about it though if you have a 30 year fixed mortgage with a $100,000 loan at a rate of 5% you would pay around $93,000 in interest.
However if you were able to get a rate of 3.5% with good credit you could get the same 30 year fixed mortgage with a $100,000 loan and only pay around $61,000 in interest, saving you around $32,000 on interest. That’s a heck of a savings.
Chris @StumbleForward recently posted..Identity Theft in America – What States Carry The Highest Risk
Another way to help your credit score or avoid lowering your score is to look at your credit utilization ratio. This is the ratio of credit balances compared to overall credit limit. If your ratio is too high, then that will also lower your score.
Good point Seth. Credit utilization also has a very high weighting with a score too. This is probably the one reason I always pay my credit cards off each and every month.
Chris @StumbleForward recently posted..Identity Theft in America – What States Carry The Highest Risk
I definitely work to improve my credit score. Right now it’s at a high 700 number (can’t remember exactly). If you can use your credit score to your advantage, then do so!
Michelle @ Making Sense of Cents recently posted..Should I still be anonymous?
I agree with you Michelle. I’m in the process of building a new house right now and my score is over a 740 right now and I’m using that to my fullest advantage to land the best rate possible. In fact I may be able to get a 3.5% rate. Boo Yaa!
Chris @StumbleForward recently posted..Identity Theft in America – What States Carry The Highest Risk
While we don’t focus on the exact number, our habits have helped us build really healthy credit scores. It’s not a be all or end all, but you shouldn’t ignore it entirely like the suggestion today on budgets are sexy.
Mrs Pop @ Planting Our Pennies recently posted..How Do You Go From Minimum Wage to $80K In A Year? Part 1
I agree you should spend every waking hour worrying about your credit score but as long as you can keep the basics down such as not missing any payments, and keeping your credit cards paid off each month, you’ll avoid most of the credit issues people have.
Chris @StumbleForward recently posted..Identity Theft in America – What States Carry The Highest Risk
Unless you are planning on paying for everything with cash (including a house) making sure your credit score is high should be one of the most important things you focus on with your finances. Small changes can have a big effect on the amount you pay in interest.
Sean @ One Smart Dollar recently posted..What You Need to Know About PrePaid Debit Cards
For sure, it’s pretty damn important if you want to buy anything on credit. Without a good credit score you’ll just end up giving away extra money to the lenders.
Not to sound…how do i put this…dumb….but do other countries rely on credit score as much as the United States. Jeremy is credit score big in Canada?
Christopher @ This that and the MBA recently posted..Tips for a Memorable Weekend Getaway
I’m not sure if it’s as much, but it’s definitely a thing. We also live in a very credit-based society, with student loans, cars, houses, credit cards, etc, so the credit score stuff makes a difference. It is rare, but sometimes there will be credit checks for employment or landlords.
Anne @ Unique Gifter recently posted..I’m Giving Away a Gift!
I would think it is just as important here in Canada or really any other developed country. They might have different variations of how their credit score is calculated. Obviously they need some way to determine how much of a credit risk you are.
Having a good credit score will save you tens to hundreds of thousands of dollars over your lifetime if you have a mortgage. It is insane but true.
Lance @ Money Life and More recently posted..October 2012 Monthly Goals Update
Oh a mortgage is huge when it comes to having good credit. Now that I’m getting my first mortgage I am so thankful that I’ve maintained good credit over the years.
Employment opportunities is the hundred pound gorilla here. Even if you have little debt, you want to make sure and get the good job!
AverageJoe recently posted..Did You Miss the October Tax Filing Deadline?
Very true. Having good credit doesn’t mean a whole lot if you’re earning too little to really put it to use.
Another point that I would add to this is that some landlords will check your credit score and history, before renting to you.
Anne @ Unique Gifter recently posted..I’m Giving Away a Gift!
That’s true. Landlords don’t want to rent to someone who might stiff them on rent.
It was my understanding that potential employers did a soft pull rather than a hard pull and didn’t see your actual score. Am I wrong?
Brent Pittman recently posted..Should Pastors, Ministers, and Clergy Opt Out of Social Security?
Your probably right about that Brent. However, I’m an employer and have never pulled anybody’s credit as requirement to work for me, that’s not saying that I might some day however I can’t say this for bigger employers though.
Chris @StumbleForward recently posted..Identity Theft in America – What States Carry The Highest Risk
I’ve had both by employers.
John recently posted..Thomas Jefferson | The Man Behind the Declaration of Independence
Even if you don’t plan on taking out a loan or mortgage I think you should pay attention to your score. Not only to protect yourself agains identity theft but also because it’s used for so many things. A lot of places won’t allow you to rent if you have a low credit score unless you put down a hefty deposit.
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Also your plans sometimes change. Maybe you don’t want a mortgage now, but down the road that might change. If you’ve messed up your credit in that time, you may be out of luck or stuck paying very high interest rates.
Employers can pull your credit report only when they have permissible purpose: when the position requires the employee to handle money, and a few others. They can look at your risk score if they pay for the privilege.
Property and casualty insurers have permissible purpose under the law and auto and homeowner insurers often use credit scores as part of their underwriting process. Health and life insurance does not permissible purpose, and the scores are not used at this time.
Kevin @ Savvy on Credit recently posted..Paying Card Balances – Don’t Ignore a Friend
I’d think employers could stretch those rules a bit by defining handling money different. For example if you’re handling expensive products or have control over crucial processes, I wouldn’t be surprised if they still did a credit check. Then again when you have a good work history, you’re less likely to be a threat. So it’s probably more lower end jobs that would be looking into this.
Good post with info that everyone should know. I’ve worked hard to have a good credit score and inreturn was blessed with the best loan interest rates. I can’t stress enough to those right out of highschool how important it is to plan for the future. A bad credit score is hard to fix because one of the best ways to improve a bad credit score is by taking out loans, which you’ll never get with a low score. How about the frustration in that!
John recently posted..Thomas Jefferson | The Man Behind the Declaration of Independence
Yep once you get in that situation it is so hard to climb out of. Luckily I’ve never had to deal with it. I’ve just always been rather responsible with credit and have paid off multiple loans. So these days I also get great interest rates and qualify for large lines of credit.
Good post. I’d also add that your credit score can influence things like finding a home – I always check the credit scores of potential tenants, for example.
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That would be super frustrating to not even be able to rent a home because of your credit score. It makes sense for landlords to protect themselves though.
I’m at a point in my life where I’m trying to avoid debt and new loans. I have a 30-year mortgage at a low rate and about $3,000 left on a car loan. My plan is to pay off that car loan and buy my next car with cash.
I want to get off the loan treadmill, so I’m not that concerned about my score per se… whether it’s 650 or 760 doesn’t much matter if you’re not going to borrow money.
You make some great points about other ways a credit score can impact people though… even if you don’t need to borrow money, a score in the 500′s could cost you in all the ways you listed. That’s what makes this a great post!
Joe Morgan recently posted..The Worst Things For Your Credit Score.
Yes a low credit score does matter a bit less when your plan is to buy things in cash, but I’m sure you still do the right things to keep your score high. It’s usually the unfavorable habits that hurt your credit score after all. I’m not convinced that buying a car with cash is the best route, but I can see why some people just want to avoid any debt.
This post does an excellent job of teaching someone why they don’t want bad credit. However many consumers have a hardship and already have bad credit unfortunately.
It is important for consumers to understand how to improve their credit score.
On one of the comments from Joe Morgan, he mentioned that on his next car he would pay it off in cash. I recommend having a card loan. It is good for your credit score if you have a mixture of accounts including secured and unsecured debts. It is good to show other lenders that you can pay your car payment on time each month.
However Joe, paying your car off in full save you money in interest.
Also, using your cards and paying them off in full each month, will save you money in interest, and really help with increasing your credit score. Even if you have bad credit, start using credit responsibly and you can improve your credit fast.
I see many consumers that have below a 600 credit score after filing for bankruptcy, but then improving their credit score within 2 years after filing to be higher than 700.
Really it’s something that people need to be better educated about before they get into trouble. Improving your credit score is much more difficult when it’s already low. When your score is good, it’s so much easier to attain loans and credit cards that could help boost your score.