When you swipe a credit card or take out a loan to make a purchase, you probably don’t think of the experience as a test of your personal integrity or reliability. You’re more interested in how you’ll feel behind the wheel of your new car, walking through your new home’s kitchen, or sitting in front of your new flat-screen TV.
But your creditors don’t care about how your purchasing habits improve your personal happiness or quality of life. They just want to recover the money they lent you — with interest. And they know from experience that it’s more difficult to recover said money (and interest!) from some borrowers than others.
The risk that you won’t repay your loans is known as your credit risk. Lenders assess credit risk using three-digit personal credit scores. The lower your credit score, the more trouble you’ll have qualifying for a credit card, mortgage, and many other types of credit.
There are also many less well known consequences of a low credit score. Find out what they are and how they can affect your life in unpredictable, unwelcome ways.
How Your Credit Score Works
Your personal credit score is based on the information in your credit report, which is a comprehensive look at your recent financial history.
- Past loan payments, including late or delinquent payments
- Credit utilization (how much you borrow as a percentage of your approved credit lines)
- Recent credit applications, generally stretching back two years
- The different types of credit accounts you have, like credit cards, personal loans, auto loans, home loans, and more — with information about the credit limit, lender, and other details for each
- Recent adverse financial events, like bankruptcies and foreclosures
In the United States, most consumer credit reports are issued by the three major credit reporting bureaus: Experian, TransUnion, and Equifax. Keep in mind that although your credit score is derived from the information in your credit report and history, your credit score is not your credit report.
Your credit score is a number that summarizes your credit risk. Consumer credit scores generally follow a scale ranging from 300 (riskiest) to 850 (least risky), although there are exceptions. The most popular credit scoring methodology was devised by FICO and is known as your “FICO score.”
Lenders often segment credit score ranges into quality classifications, such as “A,” “B,” and “C.” They may use qualitative descriptors, like “Good,” “Very Good,” and “Excellent.” They may also draw a line separating “prime” and “subprime” borrowers at a particular score — usually somewhere in the 600s, depending on the lender.
Because each bureau’s report contains slightly different information at any given time, a credit score based on your one report is likely to vary a bit from the score based on another. That said, all three bureaus are considered reliable sources of credit-related information, and your score shouldn’t vary more than a couple dozen points at any given time.
The Possible Costs of a Bad Credit Score
Your credit score and, by extension, your overall credit profile don’t just affect your personal finances. Your credit influences many aspects of your personal and public life, including plenty that don’t involve borrowing.
This list covers seven well-known and not-so-well-known consequences of bad credit, such as difficulty getting approved for a loan, higher rates and terms on approved loans, costlier insurance, and difficulty qualifying for a traditional cellphone contract.
1. Getting Approved for a Loan Can Be Difficult
You probably know already that your credit score directly affects your likelihood of securing approval for a new loan or credit application. The lower your score, the less likely you are to find a willing lender. Many lenders simply don’t make loans to subprime borrowers or those who fall below a particular quality level or numeric score.
This can feel unfair because practically speaking, a credit score of 698 isn’t much different from a credit score of 702. But 700 is an important level to many lenders, which means those four points often make a real difference — with real-world consequences for your ability to invest in your future.
2. Higher Rates and More Restrictive Terms on Approved Loans
Getting approved for a loan counts as a victory. But if your loan comes with an unfavorable interest rate or restrictive terms, it could soon feel like a hollow one.
Every lender is different, and for competitive reasons, most are reluctant to disclose exactly how they set interest rates. But most are upfront about the fact that lower credit scores mean higher interest rates. According to Bank of America, one of the biggest lenders in the United States: “A higher credit score may help you qualify for better mortgage interest rates … and some lenders may lower their down payment requirement for a new home loan.”
The impact of higher rates and more restrictive terms can be enormous. An interest rate difference of a single percentage point can add tens of thousands of dollars to the total cost of a mortgage, depending on how the loan is structured. I used a free mortgage calculator to find the lifetime interest cost difference for a 30-year, $400,000 mortgage at 6% vs. 7% interest:
|Total Interest at 6%
|Total Interest at 7%
A single percentage point higher and you pay nearly $100,000 more over the 30-year life of the loan. Astounding! And although the numbers aren’t quite as large, the same effect applies to auto loans, home improvement loans, personal loans, and credit cards.
In many cases, the difference between a good credit score and a not-so-good credit score is less obvious for inexperienced borrowers. For example, if you’re a first-time homebuyer with a 615 credit score, your only realistic chance at getting a mortgage might be to a FHA home loan. But FHA loans take longer to close than conventional mortgages, which can scare off sellers. They also come with expensive mortgage insurance requirements that may last the entire life of the loan, adding hundreds to your monthly payment.
3. Trouble Renting an Apartment
If you’re applying for an apartment lease and local laws don’t explicitly prevent them from doing so, the landlord is likely to run your credit. Which makes sense. Like it or not, applicants with lower credit scores are statistically less likely to make timely rent payments. Landlords are especially wary of applicants with patterns of late payments, delinquencies, foreclosures, and bankruptcies in their credit reports.
But if you’re an applicant, this arrangement may not feel fair — and it can have a major impact on where you end up living. Landlords who own well-kept, modern properties in desirable neighborhoods typically hold renters to higher credit standards because high demand for their properties affords them the luxury of picking and choosing who they rent to. I’ll never forget one of my ex-landlords telling me that he wouldn’t rent his best properties to anyone whose credit score came in below 640, but that he was more lenient about places on what he called “the wrong side of town.”
He’s not the only one. Small-time landlords like him and bigger management companies alike follow the same general pattern. So if your credit score is below prime, you could find yourself in a shabby rental in a neighborhood you’re not crazy about.
4. Trouble Getting a Job or Security Clearance
According to a study cited by the Association of Psychological Science (APS), there’s little if any correlation between employee credit and job performance. Worse, APS found that credit checks during the hiring process appeared to reinforce racial disparities in employment by disproportionately disadvantaging Black applicants.
But that doesn’t stop employers from checking applicants’ credit during the hiring process. In fact, unless you live in one of the handful of states where the practice is banned or severely restricted, you should expect to have your credit checked when applying for a job. According to a survey by Demos — a think tank that focuses on consumer finance issues — one in four job applicants have had their credit run, and one in seven has been advised that they were denied a job due to poor credit (such disclosures are required in some jurisdictions).
Applicant credit checks are especially common in government and the financial industry. And the credit check process can rear its head even after you’re hired. Government agencies and contractors may run credit checks when you apply for a promotion that requires a new or higher-level security clearance, which means your boss could pass you over for reasons that have nothing to do with your job performance.
5. Trouble Getting a Cellphone Contract
Getting a cellphone contract sounds trivial when you’re worried about finding a job or place to live. But these days, living without a cellphone isn’t really an option. Do you even have a landline anymore?
Unfortunately, cellphone carriers pay close attention to new customers’ credit when determining whether to approve a new contract. As in rental housing, they know that higher-risk customers are less likely to make timely payments or have enough money in their account on the auto-debit date. Even if you’re only interested in a month-to-month phone plan, your carrier is still likely to run your credit because they know how easy it is to rack up excessive data, roaming, and international calling charges in a single month.
If you’re disqualified for a traditional cellphone contract due to a bad credit score, you still have options. They’re just likely to be costly or inconvenient.
Some carriers accept security deposits in an arrangement similar to a secured credit card. If you make timely payments, you generally get your deposit back after a year or two.
A prepaid phone plan is another option. The catch is that you often have to pay out of pocket for your new phone or find yourself choosing from older, less fun models. Prepaid plans are more likely to have restrictions on talk and data usage, though these aren’t as common as in the past.
6. Higher Insurance Premiums
The federal Fair Credit Reporting Act allows auto and homeowners insurance companies to pull consumers’ credit reports when making underwriting decisions. Most states further govern this practice, though few outlaw or severely restrict it.
Timely payment histories and outstanding debt levels are particularly important to insurers. If you don’t stack up well on these metrics, you’re likely to pay higher premiums than someone with better credit on an otherwise identical policy.
7. Potential Strain on Personal Relationships
Your credit score and overall credit profile can put tremendous strain on your personal life, especially the relationships that matter most to you. Although your credit profile doesn’t actually merge with your spouse’s after marriage, their credit can affect your ability to qualify for or afford new loans that you’re applying for together, such as auto or home loans.
Say you have excellent credit and your spouse’s is just so-so. When you apply for a mortgage, the lender looks at both profiles and assesses your household’s overall credit risk as the riskier of the two (your spouse’s). So even if your risk is low enough to meet the lender’s qualification standards, you’re likely to pay a higher interest rate or larger down payment together than you would were it just you applying for the loan.
To take another example, if you and your spouse jointly apply for a credit card with you as the primary user and they as the authorized user, their card usage and payment history (or lack thereof) can affect your credit. Should they fall behind on payments or rack up irresponsible charges, both of your credit profiles suffer the consequences.
Situations like these can lead to tension at home — possibly threatening the relationship’s very existence.
Bad Credit Score FAQs
Still have questions about what your credit score means for your finances, career, and personal life? See our answers to some common questions about bad credit — and what to do about it.
What Counts as a Bad Credit Score?
It depends how you define “bad credit score.”
The lowest FICO credit score considered “prime” by U.S.-based lenders is 660. Scores between 620 and 659 are considered “near-prime.” On the qualitative scale, near-prime scores are considered “fair” or “average.”
Verge below 620 and you’re getting into bad credit territory. Precise cutoffs vary, and many lenders prefer “bad” to poor, but suffice to say that if your credit score is below 600, it needs work.
Can You Get Insurance If You Have a Bad Credit Score?
Yes, you can get insurance if you have a bad credit score. But you’ll probably have to pay more for it via higher premiums.
To find the best possible deal, follow the age-old rule of buying insurance and shop around. It takes only a few minutes to get multiple quotes using an online insurance broker, and you could save hundreds per year on big-ticket auto or home policies.
Can You Lose Your Job Due to a Bad Credit Score?
No, you’re unlikely to be fired from your job due to a bad credit score alone. It’s more likely that you won’t get the job in the first place or that you’ll be denied a promotion that requires a higher security clearance. Not that those outcomes are much better.
Can You Get Evicted If You Have a Bad Credit Score?
No, you probably won’t get evicted from your apartment just because you have a bad credit score, or because your credit score drops due to a missed loan payment.
But you certainly can get evicted from your apartment for missing multiple rent payments, which is statistically more likely for folks with bad credit.
This is why many landlords avoid renting to people with low credit scores and why you’ll likely have to work harder to find a place if your credit isn’t where you’d like it to be.
Does Your Spouse’s Credit Score Affect Yours?
Not exactly. Your spouse’s credit score has no direct bearing on yours, but their actions can affect your credit and vice versa. For example:
- You take out a joint loan (like a mortgage) and your spouse stops paying their share. Eventually, you default on the loan, damaging your credit.
- You cosign your spouse’s loan application and they stop making payments at some point down the road. Your credit score drops along with theirs (unless you step in to make payments for them).
- You make your spouse an authorized user on your credit card and they rack up a ton of charges they can’t pay back. You know the drill by now.
Trust is always important in a relationship, but so are boundaries. If you don’t trust your spouse to make financial decisions in your own best interest, think carefully before merging your finances completely.
How Long Does It Take to Improve Your Credit?
It depends on your starting point and on the details of your credit profile. It’s often easier and faster to build credit from the ground up than to recover after a major financial setback, like bankruptcy.
It’s hard to overstate the importance of your personal credit. At the same time, it’s not the end of the world if your credit score isn’t exactly where you want it to be at the moment.
With such an incredible range of online credit-tracking resources, it’s easy to monitor your credit and learn how to improve it. Tracking your credit is also a great way to boost your financial self-confidence. Every incremental credit score improvement due to a timely payment or reduction in credit utilization is a minor cause for celebration. And the sooner you begin, the sooner you can start racking up those little wins.