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A good credit score gives you access to premium credit cards, better loan products, and better interest rates.
But if you have a bad credit score—somewhere in the FICO range of 300 to 579 or the VantageScore range of 300 to 600—you will miss out on these deals and often pay much higher interest on credit cards, loans, and mortgages.
A bad credit score can make life difficult in many ways, and can delay retirement by costing you more money over time. But improving your credit score is much more than just luck, and it’s only possible if you understand how your credit score affects your life.
Below, CNBC Select talks with financial expert John Ulzheimer, formerly of FICO and credit bureau Equifax, about the most common disadvantages of bad credit. Additionally, it presents the first step you must take to break the cycle of bad credit.
1. You are too risky for ordinary lenders
Because banks like Citi, Bank of America, and Discover have strict criteria to determine who qualifies to lend, you may not qualify for traditional loans or credit cards when you have a poor credit score.
“The practical effect of poor credit is that your access to core financing is limited or nonexistent,” Ulzheimer tells CNBC Select.
But before you seek out loans from lesser known sources like payday loans, pawn shops and property loan companies, Ulzheimer stresses the importance of reading the fine print.
Payday loans, for example, are an easy way to get quick cash if you’re in trouble, but they come with disclosures that the APR can be as high as 400% to 700%. Ulzheimer explains that this should be avoided if possible.
“If you have a choice between a $10,000 personal loan from Wells Fargo or a loan from Joe’s Title Lo, reading the disclosures and agreements will make it very clear that the major lender will give you a better deal — that’s just math,” he says.
2. You pay more for your loan
A good credit score will not only help you deal with more reputable institutions, but will also give you the best interest rates on loans.
According to Ulzheimer, consumers get the best deals on APR auto loans of 720 or higher, and mortgages of 750 or higher.
Let’s say you apply for a mortgage with a FICO score of 620. For a $300,000 home, you might pay interest about 4.8% at current rates, while a buyer with points between 760 and 850 would borrow at about 3.2% APR.
The difference of 1.6% seems small, but in this case, a lower credit score would increase your mortgage payments by about $275 a month — costing you $99,000 over 30 years.
3. Your premiums may go up
Most US states allow credit-based insurance scoring, which gives auto and home insurers permission to include your money habits in their assessment of your risk.
A drop in your credit score will not automatically increase your premium, and your policy will not be canceled if it drops below 600. But a bad credit score may prevent you from getting the lowest rate possible. If you want to see the insurance score based on your credit, you can request a report through LexisNexis.
(Note: Registration of credit-based auto insurance is prohibited in Hawaii, while registration of credit-based home insurance is prohibited in Maryland. This practice is completely banned in Massachusetts and California.)
4. You may miss out on job opportunities
Good credit habits prepare you for better career opportunities. In most states, employers are allowed to pull consumer credit reports for hiring decisions, and even when deciding who should be promoted and reassigned. (This is especially 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 open lines of credit, any outstanding balances, auto loans, student loans, past foreclosures, late or missed payments, i.e. Bankruptcy balances and collections.
5. You will have a hard 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 easy if your credit score is 700 or higher. When you have poor credit, you may have to scramble to find a cosigner or pay a security deposit before signing a new lease. It is not impossible to rent an apartment with bad credit, but it can certainly be more difficult.
6. You will spend more time with utilities, including the Internet
“Utility companies are allowed to charge deposit fees when you have a poor credit score,” explains Ulzheimer. “And I don’t know of any utility companies that will give you an account without a background check.”
In some states, there are safeguards against termination of your access to public service utilities such as water, electricity, gas, and heating (see state-by-state policies on the Low Income Home Energy Assistance Program website).
And if you’re denied access to power utilities because of poor credit, you may be able to pay a deposit or provide a letter of guarantee that essentially acts as a guarantor or co-signed agreement if you default on your bills (read the FTC’s Consumer Information on Utility Services).
As for non-public utilities, such as the internet and cable, there are fewer legal protections in place to ensure access to these services, even though the United Nations now considers internet access a human right.
7. You won’t enjoy the best rewards credit cards
8. You’re delaying building wealth – and even retirement
Bad credit can have a long-term impact on your financial life. If you have high-interest credit card debt, you won’t be able to put any money into the future — at least not enough to balance your APR fees.
As long as interest rates are high, you put less money in stocks and assets and more money in debt service. Debt has no return on investment. The money you pay in interest is money you will never see again.
In some cases, eligible consumers should consider a balance transfer credit card with a limited annual interest rate of 0%, such as the Aspire Platinum Mastercard®. A balance transfer card can help make some interest payments if you have an outstanding debt to pay off. When you lower your debt-to-credit ratio your credit score should improve so it may be worth refinancing your mortgage or car loan to see if you can earn a better APR, get rid of some of that interest and put it aside for retirement savings .
See: How 0% APR Cards Work and How to Make the Most of Your Balance Transfer.
How to break the bad credit cycle
“If you have really poor credit, you probably know it,” Olzheimer says. You may feel embarrassed, guilty, or anxious, but you probably “won’t be surprised if you pull your balance and find overdue and overdue accounts.”
The main reason people with bad credit scores don’t improve is not because they are unaware; That’s just because they got caught in a circle.
Think of it this way, says Olzheimer: “If you spoil a pizza, you can throw it out and pop another in the oven. But credit is a very self-governing and punitive environment.”
In other words – it is not easy to start over. Payment arrears (accounts that are more than 30 days behind on payments) remain on your credit report for at least seven years.
But Ulzheimer reminds consumers that seven years isn’t a life sentence — unless you keep “resetting the clock” by defaulting on more and more payments.
Options to get out of debt
The first step to break out of the debt cycle, Olzheimer says, is to “press the reset button.”
This could be talking with a nonprofit credit counselor, working with a debt attorney, filing for bankruptcy, or even staying out of the credit game for the next several years if necessary.
“You may need to sit on the sidelines for a while,” says Ulzheimer, which could mean getting rid of your credit cards.
He explains that if you qualify for one of the best credit cards from CNBC Select for bad credit, “expect punitive terms.” This could be an annual fee (but there are no bonuses to make up for it), an above-average annual interest rate, or even a secured credit card like the Discover it® Secured Credit Card, which requires a $200 security deposit.
Improve your credit score in the future
A weak credit score can be improved. Bad signs can disappear after seven years for delinquency and ten years for Chapter 7 bankruptcy.
Over time, your credit score can naturally rise as you refrain from adding more debt and paying your bills on time. At the very least, making the minimum payment each month will help improve your payment history on time and lower your debt to credit ratio.
In the meantime, learn about the most common credit card mistakes so you can feel confident using them again and understand exactly how to stick to your terms and agreements.
“Often, people fall into the trap of assuming that if they pay nearly enough to cover the minimum payment, or miss the due date by only a few days, this should somehow be accounted for and should not be penalized,” Ulzheimer explains. .
“But if you can get away with that kind of thinking, you’ll wake up one day and see a better result. And you’re usually not more than seven years away from having great credit — I promise.”
To determine which credit cards offer the best value, CNBC Select analyzed 234 of the most popular credit cards available in the US, and compared each card to a set of features, including: annual fee, minimum security deposit, credit limit, rewards program, introductory and standard APR, welcome bonuses and foreign transaction fees, as well as factors such as required credit score and customer reviews when available. We’ve also considered how easy it is to upgrade a card from secured to unsecured and how quickly your security deposit can be recovered.
Since it’s unusual for secured credit cards to have strong rewards programs, we haven’t analyzed how many rewards points you can earn in the first year. For cardholders looking to rebuild credit, it is more important to practice good credit card habits – spending within your means, paying your balance on time and in full – rather than trying to improve your score balance.
Information about the Capital One® Savor® Cash Rewards® credit card and the Aspire Platinum Mastercard® credit card has been independently collected by CNBC and has not been reviewed or provided by the card issuer prior to publication.
For Discover it® Secured Credit Card rates and fees, click here.
Editorial note: The opinions, analyses, reviews or recommendations in this article are those of the editorial board alone, and have not been reviewed, approved or otherwise endorsed by any third party.