When was the last time you checked your credit score?
Credit has a significant impact on our lives,whether we like it or not, so it is important we stay clued-up on the ways we can improve our credit score. Good credit habits can change your life for the better. Bad credit habits can make things like getting a loan harder.
However, despite the importance of good credit management, there is plenty of misinformation out there, making it difficult to know what is legitimately useful. We want to clear a few things up once and for all.
This guide will use facts and statistics to explain how bad credit can impact your finances. And remember, just because we are about to hit you with some hard facts about the impacts of bad credit, that does not mean it is all doom and gloom. We will also show the silver lining with some all-important practical tips on how to better manage credit and improve your score.
30 Must-know Facts and Statistics
43% of Americans Haven’t Checked Their Credit Scores in the Last Year
Let’s start with a bit of advice: check your credit score regularly — even if you are scared to see the results. According to a survey conducted by the Consumer Federation of America and VantageScore Solutions, a staggering 43% of us have not checked our credit scores in the past year — that is nearly half of Americans failing to review vital information that may be on our file.
After all, you won’t know if there is a problem unless you check your score often (including the risk of theft or fraud — but more on that later), so try making a habit of checking as regularly as you can.
Remember, checking your credit score will not harm it as long as it is a soft inquiry, such as a brief look over the information that leaves no negative footprint on your file. This is different from a hard inquiry like when a loan or credit company does a full-on comprehensive review of your credit.
28 Million Americans Are ‘Credit Invisible’
While having a bad credit score can prevent you from getting approved for new credit cards and loans, not having a credit score whatsoever can be detrimental, too.
Despite these concerns, 28 million Americans are still “credit invisible,” which basically means that they have no credit history with any credit scoring companies such as FICO. In fact, around 15% of all Americans are yet to get their own FICO score — meaning lenders are more likely to reject your application, as there is no indicator of the state of your personal credit management.
What’s more, 21 million Americans also have a so-called “stale” credit history, meaning there is insufficient information in their file to produce any sort of score at all.
Credit Scores Are Based on 5 Factors
Before we get into the impacts of bad credit, let’s take a second to explain what makes up your score. What factors are taken into account when credit scoring companies like FICO calculate your scoring? Well, FICO uses a mix of the following 5 key financial factors:
Payment History (35%)
How consistent you are with making payments on time
- Delinquent payments can be detrimental
Accounts Owned (30%)
How much of your available credit you use
- Maximizing your credit limits can be detrimental
New Credit (10%)
How often you apply for new credit
- Too many rejected applicants can be detrimental
Length of Credit History (15%)
How well you use your credit over time
- Usually the longer the better
Credit Mix (10%)
How many different types of credit you successfully manage
- Variety shows trust
Just keep in mind that you do have control over these factors. It is down to you to make smarter decisions when managing your credit — especially with the factors that weigh heaviest in your score, like missed payments.
Credit Reports Are Not the Same Thing As Credit Scores
Although they are interlinked, your credit report (also known as a credit file) is different from your credit score. Here is the difference:
A credit report is a collection of various information regarding your credit habits and behaviors, including the accounts you have open, and the payments you make. There are 3 main credit bureaus that publish credit information about you: Experian, Equifax and TransUnion.
A Credit Score is a numerical representation of how well you manage your credit. Your individual score reflects how much of a trustworthy borrower you are, and how well you pay off debt.
Too Many Credit Cards Can Lower Your Score
Although having a variety of credit forms can boost your score, having too many can be a red flag to lenders — especially if they are all maxed out. The thing is, credit card lenders know exactly how to tempt new customers in with discounts and offers, but it is important that you keep your credit to a manageable size.
If you do open new accounts, make sure that you keep the old ones open — even if you are not using them — that way you will maximize your length of credit history. This is a factor that can give your credit score a well-needed boost.
Most Lenders Use FICO To Decide Whether To Approve Applications
FICO is one of the most popular credit scoring companies in the world.
In fact, over 90% of credit lenders use FICO to make their lending decisions.
To assess your level of creditworthiness, lenders will review the different factors that influence your financial life — including your score, which represents how well you have managed your credit in the past and how much of a dependable borrower you are.
11% of Americans Have the Lowest Possible FICO Score
FICO uses a scoring system that categorizes individuals' scores into threshold ratings: Poor, Fair, Good, Very Good, or Exceptional.
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|FICO Score Range||Threshold Rating||Description|
|<580||Poor||Well below average. You are considered a risky borrower to lenders.|
|580 to 669||Fair||Slightly below avearge. Some lenders may still approve you.|
|670 to 739||Good||About average. Most lenders will approve you.|
|740 to 799||Very Good||Above the average. You are considered a trustworthy borrower.|
|800+||Exceptional||Well above average. You are considered the best, most trustworthy type of borrower.|
With these thresholds in mind, it might be surprising to know that 11% of Americans are categorized into the lowest FICO rating of Poor, i.e. those who are considered to be the highest risk borrowers.
That’s a lot of people who are struggling to apply for credit and are unlikely to be offered any form of attractive borrowing — whether that is a mortgage, a credit card, or a simple payday loan.
18% of Americans Have a Below-average Score
18% of American consumers fall into the Fair rating. This threshold is considered to be a below-average score.
Although this rating is not the worst, consumers who do fall into this category are still considered a slight risk for lenders. That is nearly a fifth of all Americans probably struggling with financial difficulties because they cannot apply for credit and have little to no access to credit products.
17% of Americans Have Paid Credit 3 Months Late in the Past 2 Years
Delinquent payments are a guaranteed way of making your credit score plummet, i.e. late payments made 30 days or more past the due date. In fact, payment history makes up around 35% of your FICO score calculation. Despite this, 17% of Americans have still failed to pay some form of credit on time in the past 2 years — in some cases over 90 days late.
The good news is that while a late payment will show on your credit file at first, the impact on your credit score should dwindle as you stay more punctual. Keep on top of your due dates and make sure that you pay any outstanding bills as soon as possible.
75% of Americans Miss Credit Card Payments Due to COVID-19
Here is another statistic that shows just how many of us make late payments. 43% of people missed their payment because of needing the money for other essentials. The truth is, even an occasional late payment can significantly decrease your score — especially if you already have a clean credit file, without any delinquent payments whatsoever.
Generally speaking, late payments hurt the consumers with better credit histories most — meaning those with a good score should particularly watch out. Just 1 missed payment can bring your score plummeting faster than it will take to build it back up. Anyone with already poor credit shouldn’t be impacted as much because they have minimal points to lose.
Late Payments Can Stay on Your File for up to 7 Years
The impacts of missed payments might differ from person to person, but they tend to all stay on your report for around the same amount of time — regardless of whether you pay the debt off. Even the mistakes you made years ago can follow you for some time, including more serious issues such as foreclosure and bankruptcy.
Delinquent payments are some of the longest lingering issues — with some staying on your file for up to 7 years. Here is a brief overlook at the issues that impact your credit file, and the statute of limitations expiry time:
|Type||Maximum Time on Credit File|
|Soft inquiry||No impact|
|Hard inquiry||2 years|
|Delinquent payment||7 years|
|Defaulted account||7 years|
|Bankruptcy||7 to 10 years|
The Fair Credit Reporting Act (FCRA) states that credit scoring companies must delete the record of late payments as soon as the statute of limitations expires — and the same goes for the various other credit-related issues that appear on your file, too.
FICO Scores Are on the Rise
It is not all bad. FICO scores are actually on the rise. In fact, a whopping 43% of Americans have a score of 750 or above (considered Very Good). 22% of Americans also have a score of over 800 (considered the top, most trustworthy consumers with Exceptional scores) — that is nearly a quarter of us in the elite category.
With many of us having so-called excellent credit history, that means more and more of us are learning about the simple yet effective ways you can improve your score, including:
- Keeping track of your finances and paying bills on time
- Keeping your credit utilization low (i.e. not maximizing your credit card limits)
- Having a variety of credit types (credit cards, mortgages, installment loans, etc.)
- Keeping your address and other personal information up-to-date
- Not applying for new credit too often
Low-income Americans Particularly Struggle To Improve Their Credit Score
Not everyone is knowledgeable about these methods of effective credit management. In fact, according to research carried out by the Consumer Federation of America, low-income borrowers especially lack the understanding of how credit works (those who earn less than $25,000 per year).
In particular, the research found that:
Less than 50%
of low-income borrowers were unaware that everyone has more than 1 credit score.
More than 25%
were unaware that lenders use credit scores to assess the risks of your application.
were unaware that low credit card balances can actually boost your credit scores.
This data shows that millions of people lack the knowledge they need to maintain a good credit score — which ultimately leads to a downward spiral of bad credit.
1 in 5 Americans Have Some Kind of Error on Their Credit File
As we already mentioned, many of us believe the more you check your credit, the more you can harm the score itself. But we want to officially bust that myth — once and for all. Soft inquiries into your credit are perfectly fine, even if you request further information about a specific issue and then decide to dispute something that doesn’t look quite right.
In fact, we actively encourage checking your credit — especially since over a fifth of all Americans have some kind of existing error on their file. So next time you check your score, give everything a look over carefully to ensure that all of your details match up. For example, if there is a missed payment, double-check the official date that you paid it.
If you do find any discrepancies, report the issue to the credit bureau and request it to be removed from your file immediately.
Identity Theft Happens Every 2 Seconds
Another issue that needs to be reported immediately is identity theft, as it is surprisingly common, too. In fact, a study found that someone falls victim to identity fraud every 2 seconds. That is why it is super important to check your credit file often and pay careful attention to the details that do not quite add up.
If you do suspect that you have been a victim of identity fraud, you must take action straight away — including putting a freeze on your credit file to ensure it causes no further harm to your score. Some of the suspicious activities you can look out for on your credit file include:
- A significant unexpected drop in your score
- Unfamiliar hard inquiries
- New credit cards and loans you have not taken out yourself
- Denied credit you thought you would be accepted for
Find out more about how you can freeze your credit report. Thankfully it is now completely free to charge to do so
Over Half of Americans Revolved Their Credit Card Debt in the Past Year
If you do get accepted for credit through cards or loans, you must make sure that you manage your credit well. While getting a credit card itself can help you boost your score, the debt that you build along the way can actually be detrimental.
With a staggering 62% of Americans admitting they have revolved credit card debt in the last year, so many of us are stuck in the rut of persistent debt. Carrying your debt over essentially means that you are failing to pay your balance off and your utilization rate stays the same — which is when you might see your credit score start to dip, despite the fact you are continually paying off what you spend.
Start breaking the habit if you want to see your credit score improve. To combat the interest rates, you essentially need to start paying back more than you spend. Remember, the lower the balance you have, the easier it is to pay off the remaining debt because as your balance lowers, the interest decreases, too.
A Good Credit Score Does Not Necessarily Guarantee Application Approval
Lenders do not just look at the hard numbers on your credit score … other factors are taken into account during their decision stage, including your employment history and status.
For example, although you have a credit score that is in tip-top shape, you may also have a low income at a company you have not been employed at for a while — both being employment-based factors that can go against your application.
Other factors taken into account are financial status risks — including having a high account balance and a high debt-to-income ratio.
Your Rent Payments Can Now Affect Your Score
For quite some time, rent payments were not factored into your score — but new scoring models have started incorporating rent into credit reports to help some consumers build up their score through positive rental payments. This is good news for renters who always pay their rent on time.
But do not worry too much if you are often late on rent pay. These negative payments will not usually count. Not only do most lenders prefer to use the older traditional scoring models, but very few rent payments are actually reported to credit bureaus anyway.
Having Bad Credit Might Increase Your Interest Rates Offers
The whole point of lenders checking your credit score is them assessing your lending risk. Essentially, they are checking whether you have the means to pay it back on time.
While a lot of lenders will simply deny applicants with low scores, some might offer credit with higher interest rates than applicants with better scores.
Let’s say you apply for a car loan of $10,000. With an excellent credit score, you might be offered a fair interest rate of just 6% — which means you will pay a total interest of just $600 over the repayment period. However, if your credit score is significantly worse, you might be offered the same loan, but with an interest rate of 15% — resulting in you paying over $1,500 on interest charges alone. This is more than double that of someone with better credit than you.
Ultimately, having a bad credit can cost you more in the long-run when you have no choice but to accept the credit with unfair interest rates.
Bad Credit Can Make Your Insurance Premium Rates Soar
Another impact of bad credit might appear the next time you apply for insurance coverage. Having a bad credit score can actually increase the prices of your insurance premium rates (the amount you pay monthly or annually). This is because insurance providers factor your spending habits and credit history into their risk assessments, i.e. How likely will you pay the premiums on time? Do you have a history of late payments?
Although credit-based insurance scoring does exist in most states, insurance providers will not automatically increase your premium rates based on your score — but you are more likely to get the highest rates.
However, here is the good news: not all states allow credit-based insurance scoring. In fact, it’s been banned for car insurance in Hawaii and totally banned altogether in Massachusetts and California.
You Might Struggle To Rent a Property
Unfortunately, landlords are likely to check your credit score for the same reasons that lenders and insurance providers do. They assess how likely you will pay the rent on time to find out whether you are a risky tenant or not.
According to Experian, the minimum credit score that most people need to rent an apartment is 620. Additionally, a review from RENTCafé found that in over 5 million rental applications, the average credit score of the American renter in 2020 was 638.
However, this does not mean for sure that you will not be accepted with a lower score. After all, it all comes down to the discretion of the landlord and the size and apartment you are applying to rent. Some landlords might look past your credit history.
Bad Credit Can Significantly Increase Your Mortgage Rates
It is not just renters that are affected by bad credit. Homeowners often pay the price, too. Bad credit mostly increases mortgage interest rates the same that it does on credit cards or loans.
In fact, people with bad credit should expect to pay not just more interest but a larger deposit, too — sometimes up to 25% of the property value, rather than the standard 5% to 10% that most people with good credit are offered. This means those with bad credit might end up paying thousands of dollars more.
For example, if you have got an excellent FICO score, you can probably apply for a mortgage of $300,000 with an APR of 3% over 40 years — so you will end up paying a total of $215,371 in interest.
But if your FICO score is significantly lower, your APR offer will likely be higher, too: something like 5% — totaling $394,714 in just interest alone. This is over $150,000 more that you will be paying, just for having a below-average credit score.
Credit Debt Takes Away From Your Future
Bad credit is usually a long-term struggle, meaning it will impact your financial life into the future — including into your retirement age.
Credit debt offers no return on investment. Plus if you are paying high interest rates on things like your mortgage and credit cards, you will be putting less away each month into your savings, assets, and all-important retirement funds.
You Will Not Reap Many Financial Rewards and Benefits
Credit cards and other types of borrowing products come with all sorts of rewards and benefits — the best of which are offered to the most trustworthy customers, i.e. those with the highest credit scores.
If you have an excellent or above-average score, chances are you will receive the best offers and special incentives — anything ranging from discounted event tickets to cash-back rewards to frequent flyer miles. These kinds of bonus benefits can make a real difference to your financial life experiences — mostly because you can save tons of money if you plan ahead and keep up-to-date with the latest rewards on offer.
However, those with a below-average credit score miss out on such money-saving and life-enhancing rewards and benefits.
You Might Miss Out on Job Opportunities
Did you know that your employers can legally check out your credit history? Don’t panic — you have to give them full signed permission beforehand. However these employer requests are not unheard of and you may find yourself pressured to say yes — whether you are okay with it or not.
Although they cannot see your exact score, they will be able to see information like whether you have any outstanding balances, loans, missed payments, or any bankruptcies — which, depending on your individual score, might lead to you missing out on job opportunities.
The use of credit information to make hiring decisions is legal in the majority of states, however there are currently 11 states that have self-imposed limits, including California, Colorado, Connecticut, Delaware, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont, and Washington.
Thankfully, the Comprehensive CREDIT Act of 2020 was passed by the House of Representatives which now restricts the use of credit information by employers, except in circumstances, such as the following:
- The employer is required by federal, state, or local law to see your credit information
- Your credit information is part of a necessary background check
There’s a Connection Between Utility Bills and Credit Scores
Utility bills are a form of credit. Even basic energy resources that we need to survive in the 21st century like water, gas, and electricity can be affected by a bad credit score.
Utility providers will take your credit score into consideration when opening a new account to assess how likely you will pay your bills on time. Although you will not be charged increased interest rates on energy, providers may decide that you are too much of a risk based on your credit history — especially if a background check shows you’ve previously fallen into arrears with a past provider.
To prove you are a better applicant than your credit history says you are, you might also have to pay a deposit (however, low-income customers are usually exempt). So to get off on the right foot, it is always best to avoid the hassle by prioritizing your utility bills.
If you are denied utility access, learn more about the available government programs that can assist with vital bill paying.
You Might Pay More for Internet
Despite the importance of internet access in modern life, some internet providers will run a credit check and may quote higher prices because of your undesirable credit history.
Thankfully though, bad credit restrictions are not quite as stern from internet providers — usually the checks are just a formality. There are still plenty of companies out there that provide no-credit-check broadband packages, too.
Joint Account Activity Might Impact Your Score
Beware that having a joint account means any activity will reflect on both of your individual credit files — including any loans or credit cards opened in both your names. However, having a joint account does not mean that you will get a combined score. You will each have your own individual credit file and score — and this even includes married spouses.
Activity from authorized users on your account can affect your score, too, but it will not affect theirs. As the account owner, everything will apply to your own credit score.
If you do have an account with users other than yourself, it is important that you stay vigilant and keep an eye on their activity — as well as your own. After all, you will be the one who gets the brunt of any impact.
There’s No Such Thing as a Credit Blacklist
Before we start to wrap up, let's bust another common myth that so many people deem as true — no secret blacklist of no-go borrowers exists.
If you find that you keep getting rejected by credit lenders, it is not because you have been sectioned off as an undependable borrower who should never be trusted. It is simply because your score and credit file do not quite meet the requirements of certain lenders.
You Can Check Your Credit Score for Free
We shall conclude in the same way that we started this article — to remind you to check your credit. There are 3 quick and easy ways you can keep an eye on your score free of charge:
Ask Your Credit Card Company
Most credit card companies allow you to check your score, but the number of times is limited. Usually you can do it for free online.
Ask Your Bank
You can often get a free credit score via your online banking screen. It will be somewhere in your portfolio.
Sign Up for a Credit Scoring Company
Getting an account with a credit scoring company like FICO is the easiest way, but you may have to pay to access your score. There are also free alternatives that, while taking a few extra steps, can make it possible to view your score without being charged.
So, there you have it. Beware that bad credit can seriously impact your financial life in all sorts of ways, including paying higher interest rates and not being accepted for credit in times when you need help the most.
Often, the hardest part of having bad credit is the feeling that you are stuck in a rut — with seemingly no clear path of how to get out of the situation. In this case, it is always best to make small steps, rather than giant leaps. Simple things like ensuring that all bills are paid on the exact due date will make a massive difference in the long-run.
Although bad credit can hold you back, there are also so many different things you can do to improve your score. All it takes is perseverance and the commitment to making wiser financial choices.