These are the main disadvantages of negative credit
These are the main disadvantages of negative credit

Most Americans today have decent or better credit, but getting there can be difficult. CNBC Select Explains The Eight Biggest Bad Credit Problems ConsolidationNow and how to overcome them.

A good credit score gets you better credit cards, loans and interest rates.

You’ll lose those great deals if your credit score is below 600 and you’ll pay dramatically higher interest rates on credit cards, loans and mortgages if your score is below 300.

A low credit score can make life difficult and even delay retirement by increasing costs. But raising your credit score takes more than luck, and it requires an awareness of how much your credit score affects your life.

Below, CNBC Select speaks with financial expert John Ulzheimer, formerly of FICO and Equifax, about the downsides of bad credit. Plus, it reveals the first step to regaining good credit.

1. Traditional lenders deem you too risky.

Because banks like Citi, Bank of America and Discover have strict lending criteriayou might not qualify for loans or typical credit cards if you have bad credit.

Bad credit limits or eliminates access to traditional financing, Ulzheimer told CNBC Select.

Ulzheimer advises reading the fine print before taking out a payday loan, pawn shop, or title loan.

Payday loans, for example, are a quick way to get cash when you need it, but the APR can be as high as 400% to 700%. Ulzheimer advises avoiding them.

“By reading the documents and the agreements, it will be very obvious that the traditional lender will give you a better deal – it’s simple math,” he explains.

2. Your loan costs more

A strong credit rating not only helps you deal with more reputable organizations, but also helps you get the best loan rates.

Ulzheimer says customers get the best APR deals on auto loans and mortgages with scores of 720 or higher.

Consider a FICO score of 620 for a mortgage application. With current rates, a $300,000 home would cost around 4.8%, while a buyer with a score between 760 and 850 would spend around 3.2%.

A 1.6% difference may seem small, but it’s $99,000 over a 30-year mortgage.

3. Insurance prices may increase

Most US states allow credit-based insurance scoring, allowing insurers to include your financial habits in their risk assessment.

Your premium will not increase if your credit score drops below 600, nor will your policy be voided. However, bad credit can prevent you from getting the best rate. You can get your credit-based insurance score from LexisNexis.

(Note: In Hawaii and Maryland, credit-based auto insurance scoring is prohibited. Massachusetts and California have prohibited it.)

4. You may lose your job

Good credit habits lead to better job prospects. Most states allow businesses to access consumer credit data to recruit, promote, or reassign employees. (This is especially true if the job involves a lot of money.)

With your signed consent, your employer can review your credit report and see information such as open lines of credit, balances, car loans, student loans, previous foreclosures, late or missing payments, bankruptcies and recovery amounts.

5. It will be more difficult to rent an apartment

Experian says a credit score of 620 is generally required to qualify for an apartment.

Some landlords and property management organizations are tougher than others, but a credit score of 700 or higher can help. With bad credit, you might need a co-signer or pay a security deposit before signing a new lease. Renting an apartment with negative credit is not impossible, but it is difficult.

6. Public services, including the Internet, will be more difficult.

“Utility providers may charge deposits if you have bad credit,” he explains. I don’t know of any utility that will provide you with service without a background check.

Some states protect you against loss of access to utilities, including water, electricity, gas, and heat (see the Home Energy Assistance Program for Low-Income Households website for know the laws of each state).

Additionally, if you are denied utility service due to bad credit, you may be able to pay a deposit or submit a letter of guarantee, which functions as an agreement between you and the utility company if you default on your obligations.

Even though the United Nations currently considers internet access a human right, non-public public services like internet and cable have fewer legal safeguards.

7. No credit cards with the best rewards

The best rewards cards require excellent credit. You can get the best introductory offers and cash back incentives available today if your credit score is outstanding or outstanding.

Some premium credit cards also offer one-time access to concert and event presales, as well as cash back on streaming services.

The Capital One® Savor® Cash Rewards Credit Card is one of CNBC Select’s top cash back cards for sports fans, movie buffs and adventurers. It gives 4% cash back on dining and entertainment, 3% on groceries, and 1% on all other purchases. New cards can get a $300 bonus after spending $3,000 in the first three months.

8. You put off saving and even retirement.

Bad credit can also have long-term financial consequences. If you have high-interest credit card debt, you cannot save enough money for the future to offset your APR costs.

When interest rates are high, you invest less in equity and assets and more in paying down debt. Undeniably, debt offers no return on investment; interest is money lost forever.

Consider a balance transfer credit card with a 0% introductory APR, such as the Aspire Platinum Mastercard®. A balance transfer card can help reduce interest payments on current debt. As your debt-to-equity ratio decreases, your credit score should increase, allowing you to refinance your home or car loan and save money on interest.

How to stop the negative credit cycle?

“You probably know if you have bad credit,” Ulzheimer says. “I wouldn’t be surprised if you checked your credit and found overdue and defaulted accounts,” he says.

The main reason people with terrible credit don’t raise their scores is because they’re stuck in a loop.

“If you mess up a pizza, you can throw it away and make another one,” Ulzheimer advises. But credit is self-policing and punitive.

In other words, starting over is not easy. Defaults (more than 30 days late) remain on your credit file for seven years.

And unless you keep “resetting the clock” by missing payments, Ulzheimer says, seven years isn’t a life sentence.

Debt relief options

“Hit the reset button,” Ulzheimer urges, to stop the cycle of debt.

It could be talking to a credit counselor, hiring a debt lawyer, declaring bankruptcy, or even avoiding credit for many years.

“You may need to take a break,” adds Ulzheimer, which may involve putting away your credit cards.

“Expect punitive terms” if you get one of CNBC Select’s best credit cards for low credit. The card may include an annual fee (no perks), an above-average APR, or even a $200 security deposit (like the Discover it® secure credit card).

Improve your credit score for the future

A bad credit score can be improved. Delinquencies disappear after seven years and Chapter 7 bankruptcy after 10 years.

Your credit score can naturally improve if you avoid taking on new debt and pay your obligations on time. Making the minimum payment each month can help improve your payment history and reduce your debt-to-equity ratio.

In the meantime, you can learn more about common credit card mistakes and how to meet your terms and conditions.

According to Ulzheimer, many consumers assume that if they pay close to the minimum amount or miss the due date by just a few days, they won’t be punished.

“But if you can get out of that mindset, you’ll see a higher score one day. You’re normally only seven years away from fantastic credit.


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