You’ve probably heard that good credit is important to get a mortgage or other loan. But is bad credit really so bad? How does it actually affect your life?
An April 2017 survey from NerdWallet showed that a lot of Americans don’t know as much about their own credit as they should. Nearly half of respondents didn’t realize that bad credit can affect their ability to get a cell phone or a mobile service plan, and 12 percent had never checked their credit score before.
Bad credit can cause a lot of upheaval. Being aware of the consequences can help you avoid undue costs, limited choices and losing out on opportunities. Let’s discuss why bad credit is a big deal and what you can do about it.
The bummer of bad credit
We’ve already mentioned getting a cell phone, but how about renting an apartment? Or signing up for utilities? Or applying for a credit card? All of these actions can be inhibited by low credit.
In all these cases, creditors, businesses and landlords check your credit to determine if you’re at risk for defaulting on payments or if you can afford the service. If your credit score is low, you may have to pay higher deposits. You’ll likely be limited in the types of credit cards you can get and almost certainly have to pay higher interest rates. If your score is low enough, you could even be denied plans and services outright.
Bad credit can also follow you to your job. Many states still allow companies to run credit checks on their employees and job candidates. Whether you find this a personal invasion or not, the reality is that some companies use credit as a determining factor in the job or promotion you’re given or the field you can enter.
If you plan to be a homeowner some day, bad credit can seriously affect your ability to get a mortgage. While some mortgages do cater to first-time home buyers starting out with lower credit scores, you may not qualify if you don’t have the down payment required or if your score is lower than the minimum allowed.
Building good credit
Building credit is a process that begins with understanding what constitutes good credit behaviors. Here’s how you can start to build good credit or improve credit you may have let slip:
Make your payments. Without exception, pay all your bills and debts in full and on time. Missed or late payments are a credit score killer. And since payment history affects your credit score the most, a poor payment history is a sure way to end up with bad credit.
Reduce your debt. Carrying a balance on your credit card isn’t the best way to build credit since you will pay interest. Instead, pay off your credit cards every month and reduce other debt you may have. Showing low to no debt helps when you need to apply for a loan. It also eases up your finances so that you don’t run the risk of becoming overextended and no longer able to afford your payments.
Check your credit report yearly — at least. Past errors and old information can wreak havoc on your credit report if not spotted and corrected. Especially if you’re trying to clean up your credit. Don’t let unresolved errors damage it further.
Remember that bad credit doesn’t have to be a permanent situation. Once you recognize the changes you need to make, improving your credit score is possible and will happen over time with better habits.