Anyone who has had bad credit knows that it can be a huge pain in the butt. Oh sure, it doesn’t seem to affect your day-to-day too much. But when it comes time to get a car, or fill out a rental application, that crappy credit score comes back to haunt you. Here are a few disadvantages of having poor credit, and what you can do about it.
Your Cable, Phone and Internet Bills Can be Higher
If your credit isn’t great, don’t be surprised if your cable, Internet, or cell phone bill comes with an extra fee. We’ve told you before: service providers are allowed to charge you more for having poor credit. It’s called “risk-based pricing”.
You’ll want to check your monthly bill, or even call your service provider, to see if you’re paying extra. Then, review your credit report (which you should do anyway) and see why your score is so low in the first place. If there are any errors, write the credit bureau a letter disputing them. If that doesn’t work, there’s not much you can do to get rid of this fee aside from improving your credit.
It’ll be Tough to Apply for a Mortgage
If your credit is really bad, you might have a hard time buying a house. It’s difficult, but not impossible. Some mortgage lenders are becoming more lenient about low scores, especially if applicants have proven a year of on-time payments. You can get a mortgage loan with a credit score as low as 580, assuming you have the cash for at least 10% of a down payment. In some cases, you might even be able to get a loan with a 500 credit score, but expect to put down even more up front.
However, even if you can get a mortgage loan, your interest rate will be a lot higher than someone with great credit.
Even half a percentage point can cost you more in the long run, so you might consider improving your credit before taking out a mortgage loan. Of course, mortgage rates are really low right now, so you also have to consider the market, but your credit score plays a big role, too.
You’ll Have Higher Interest on Other Loans
High interest rates aren’t just limited to your mortgage. If you take out an auto loan or a personal loan, you can expect higher than average rates, too.
If your credit is really bad, you’ll probably have to take out a subprime auto loan (if you have to take out a loan at all). A subprime loan is a special loan for borrowers with weakened credit histories—and according to Edmunds, your interest rate on a subprime loan could be as high as 18%.
You may want to try to getting a loan with a local credit union, which might be a little more lenient. Also shop loan terms, not just monthly payment. You want to consider what you’re paying in total over time:
Look for the cheapest money — the lowest APR over the shortest period. Don’t be distracted by promises of a lower monthly payment over a longer period of time. If the only way you can make the payments is to take out a long-term loan, you probably can’t afford the car.
Credit card interest rates have a pretty wide range. According to Investopedia, they can be anywhere from 7 to 36 percent. If your credit score is poor, you can probably expect a rate of 22 percent or more, Investopedia says.
Work on improving your score, and when you notice it’s a little higher, call your credit card company and follow this script for a better rate.
You May Have Trouble Renting an Apartment
Renting an apartment can be a huge hassle if your credit isn’t great. Again, you’re seen as a risk, and the landlord or rental company wants to make sure you can pay on time each month. Luckily, there are a few things you can do to improve your chances of getting the apartment you want. We’ve detailed these methods here, but a few options include:
Provide a brief explanation: Add a statement to your credit report explaining any negative items.
Ask for a recommendation: If you’ve been current on your payments, ask previous landlords to offer a letter of recommendation stating that.
Offer an incentive: Offer to move in immediately, put down a bigger security deposit, sign a shorter-term lease, or a direct deposit from your bank.
Of course, cosigning is also an option, but not one that should be taken lightly. You may also want to consider looking for smaller, independent owners who might be willing to work with you.
When it comes time to turn on your water or electricity, the utility company might ask you to pay a security deposit if you have bad credit. If so, make sure you’re clear on what happens to this money when you move. In most cases, you’ll simply get it back when you move, but you want to make sure this is the case.
Really, that’s what the solution to all of this comes down to: improving your credit. Get a free copy of your report, review it thoroughly, then implement a few strategies to boost your score. Either way, it helps to simply be aware of each of these drawbacks so you’re prepared when the issue comes up. While there are some workarounds to each of these hassles, fixing your score is the best long-term solution.
Original article by Kristin Wong, edited for Canada by Steven Porter
Posted by Steven Porter. Steven is a licensed Mortgage Agent with Mortgage Architects and a retired licensed, real estate broker with 30 years experience in residential real estate. He can be reached at 1-905-875-2582; steven.porter@mtgarc.ca or online at 1800Mortgages.ca
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