The Prohibitive Cost of Poor Credit
FICO introduced the credit score in 1898 as a measure to help lenders manage loan risk and evaluate consumer applications. Today, credit scores are a tool used by organizations across the globe, well beyond the scope of getting a loan. Good credit grants you access to the lowest rates and best terms for lending. Poor credit, on the other hand, leads to higher costs and can become a barrier to obtaining financial security. There are five key areas that cost you more when blemishes occur on your credit.
- Higher interest rates, which increase the cost of borrowing. A lower credit score often means double digit interest on everything from credit cards to car loans, potentially doubling the cost of the goods or services. Interest payments reduce monthly cash flow with few long-term benefits.
- Higher fees. Good credit can lead to waived deposit requirements and lower loan fees. Many companies such as utilities, cell phone companies, internet providers, and satellite services use credit to establish deposit requirements. Apartment rentals and loans rely on credit scores to determine down payments, loan fees, and deposit requirements. The lower your credit score, the more you will pay.
- Higher insurance premiums. Credit scores have a direct impact on auto insurance rates. Even with a perfect driving record, you will pay higher rates if your credit suffers.
- Lower job access. An estimated 72 percent of employers complete a background check on potential new hires, which often includes a credit check. Lower scores can create challenges in getting a new job or receiving promotions.
- Loan declines. In some cases, lenders mitigate the risk of a loan default by charging higher rates, and fees. Other times they decline the loan, giving you fewer, more expensive lending options.
There is a high financial price for a low credit score.