Biggest Downsides of Bad Credit


3 Biggest Downsides of Bad Credit


biggest downsides of bad credit

 Ideally, all the decisions we make in life involve considering 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 the possibility of a less than pleasant 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 not considering the downsides, just as many bad decisions are the result of not understanding the downsides, rather than not considering them at all.


Most people know that irresponsible financial behaviors can give you a bad credit rating, for example, but many people tend to underestimate the many disadvantages of having bad credit. To help put things in context for your next monetary choice, here are three of the greatest disadvantages to having awful credit.


1. You have a high probability of being rejected for new credit

At its heart, 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 will interpret your poor credit history and low credit score when you come to ask 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 pay back what you borrow. So if you have a history of late payments or debt defaults, lenders will not want to give you more money and will reject your application for new credit.


Think of it this way: If you lend your neighbor his lawnmower in June but never return it, how likely is it that he will loan you his snowplow in December?


Since most large 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 be checking out lists of high-risk lenders who specialize in high-risk, bad-credit applicants - lenders who aren't exactly known for their affordability or top-tier rewards. Which brings us to the next big downside to bad credit: the expense.


downsides of bad credit

2. Creditors, Homeowners, and Utility Companies Will Charge You More

It took several tries, but you finally found a subprime lender who will work with you. Much difficult, right? Incorrect. Lest you think that qualifying for new credit is the only big downside to having bad credit, just take a look at how much that credit will cost you.


As we referenced, your financial assessment is the thing that loan specialists use to decide your credit hazard. 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 must find some way to balance the risk. They do this by increasing interest rates and adding additional fees.


As an example, consider a $ 10,000 auto loan repaid 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 Applicant A will pay about $ 550 in interest over the three years.


At the same time, Applicant B, who has a low credit score of 580, had to turn to a subprime lender for 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 lenders and credit card issuers who will charge you more for bad credit. You are likely to face a credit check when applying for a new apartment or when installing utilities in a new location, and having bad credit can result in you being charged a security deposit greater than you would have to provide.


3. You may pass up significant monetary chances.

An important part of finance and accounting, opportunity cost is basically considering what you are missing out on when you make 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 won't be able to eat later.


When it comes to your credit, bad credit is fraught with opportunity costs. Take credit cards, for example. With bad credit, you are stuck with using subprime or secured credit cards that probably cost a lot without offering much. In contrast, if you had good credit, you could potentially 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 buying a new car, and 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 security deposit of $ 1,000 when you move out due to bad credit. That money could easily be paying dividends in your retirement account if it wasn't wasted in the owner's bank account.


bad credit

Don't let bad credit stop you

Although it's our own choices that often lead to bad credit, few of us actively choose to build 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 top three downsides to 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 everyday considerations. Be that as it may, they don't need to be long lasting deterrents. You can rebuild your credit history over time by practicing responsible credit habits. You can also use credit repair to eliminate any mistakes or unsubstantiated accounts 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 a low credit card balance 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 great credit has many perks that will make the hard work worth it.

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