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8 Side Effects of Having a Bad Credit Score

A bad credit score can make life difficult in a number of ways, and it can even delay retirement by costing you more money over time. But improving your credit score is about much more than luck, and it’s only possible if you understand just how much your credit score impacts your life. Below, CNBC Select speaks with financial expert John Ulzheimer, formerly of FICO and the credit bureau Equifax, about the most common disadvantages of poor credit. Plus, he offers the first step you should take to break the bad credit cycle.

1. You’re too big of a risk for mainstream lenders

Since banks like Citi, Bank of America and Discover have rigorous standards for determining who qualifies for lending, you might not qualify for traditional loans or credit cards when you have a bad credit score. “The practical effect of having a poor credit score is that your access to mainstream funding is limited or nonexistent,” Ulzheimer tells CNBC Select. But before you seek lending from less-than reputable sources like payday loans, pawn shops and title loan companies, Ulzheimer stresses the importance of reading the fine print. Payday loans, for example, are an easy way to get fast cash if you’re in a bind, but they come with disclosures stating that the APR can be as high as 400% to 700%. These should be avoided if at all possible, explains Ulzheimer. “If you’ve got a choice between a $10,000 personal loan from Wells Fargo or a loan from ‘Joe’s title loan,’ reading the disclosures and agreements will make it very obvious that the mainstream lender will give you a better deal — that’s just mathematics,” he says.

2. You pay more for your loan

Not only will a good credit score help you bank with more reputable institutions, but it also gives you the best interest rates on loans. According to Ulzheimer, consumers get the best deals on APR for auto loans with a score of 720 or higher, and for mortgages, 750 or higher. Let’s say you’re applying for a mortgage with a FICO score of 620. For a $300,000 house, you might pay about 4.8% in interest with the current rates, whereas a buyer with a score between 760 and 850 would borrow at roughly 3.2% APR. A 1.6% difference sounds small, but in this case your lower credit score would increase your mortgage payment by about $275 per month — costing you $99,000 over a 30-year term.

3. Your insurance premiums may go up

Most U.S. states allow credit-based insurance scoring, giving auto and homeowners insurance companies permission to factor your money habits into their assessment of your risk. A dip in your credit score will not automatically increase your premium, nor will your policy be canceled if you drop below 600. But a bad credit score could prevent you from getting the lowest possible rate. If you want to see your credit-based insurance score, you can request a report through LexisNexis. (Note: Credit-based auto insurance scoring has been banned in Hawaii, while credit-based home insurance scoring has been banned in Maryland. The practice has been banned entirely in Massachusetts and California.)

4. You may miss out on career opportunities

Good credit habits set you up for better career opportunities. In most states, employers are allowed to pull consumer credit reports to make hiring decisions, and even when deciding who to promote and reassign. (This is particularly true if the job comes with a lot of financial responsibilities.) Your employer won’t see your exact credit score, but with your signed permission they can access your credit report and view information like your open lines of credit, any outstanding balances, auto loans, student loans, past foreclosures, late or missed payments, any bankruptcies and collections balances.

5. You’ll have a harder time renting an apartment

A credit score of 620 is often the minimum you need to qualify for an apartment, according to Experian. Some landlords and property management companies are stricter than others, but you can breathe easier if your credit score is 700 or above. When you have poor credit, you may have to scramble to find a cosigner or pay a security deposit before you sign a new lease. It’s not impossible to rent an apartment with bad credit, but it can certainly be a lot harder.

6. You’ll have a tougher time with utilities, including the internet

“Utility companies are allowed to charge deposits when you have a poor credit score,” Ulzheimer explains. “And I don’t know any utility companies who are going to give you an account without a background check.” In some states, there are protections against terminating your access to public service utilities like water, electric, gas and heat (view the state-by-state policies on the Low-Income Home Energy Assistance Program’s website). And if you are denied access to energy utilities due to poor credit, you may be able to pay a deposit or submit a letter of guarantee which acts essentially like a guarantor or co-signer agreement if you fall behind on your bills (read the FTC’s consumer information on utility services). And as for non-public utilities, like internet and cable, there are fewer legal protections in place to guarantee access to these services, even though the U.N. now considers access to the internet a human right.

7. You won’t enjoy the best rewards credit cards

The best rewards credit cards require the highest credit scores. When your score is good or excellent, you can access the best introductory offers and cash-back incentives available among credit products today. Some higher tier credit cards also give away special invitations to exclusive concert and event pre-sales, reward you with cash back on streaming services and more. Whether you’re a sports fan, a movie buffs or an adventure seekers, one of CNBC Select’s top picks for cash-back cards is the Capital One® Savor® Cash Rewards Credit Card. It offers a competitive 4% cash back on dining and entertainment, 2% at grocery stores and 1% on all other purchases. New cardholders can earn a one-time $300 cash bonus once they spend $3,000 on purchases within the first three months from account opening.

8. You delay building wealth — and even retiring

Bad credit can also have a long-term impact on your financial life. If you have high-interest credit card debt, you’re not able to put any money away for the future —  at least not enough to balance out your APR fees. As long as your interest rates are high, you’re putting less money into equity and assets and more money into servicing debt. And debt has no return on investment; the money you pay in interest is cash that you will never see again. In some cases, qualifying consumers should consider a balance transfer credit card with limited-time 0% APR, such as the Aspire Platinum Mastercard®. A balance transfer card can help knock out some interest payments if you have existing debt to pay off. As you lower your debt-to-credit ratio, your credit score should improve, and then it might be worth refinancing your mortgage or auto loans to see if you can earn a better APR, shave some of that interest off and put it aside for retirement savings.

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