Before you miss that payment, check out this list of things you can’t do with bad credit and get out ahead of your credit problems
Everyone takes their credit score for granted until they need a loan. The simple fact is there are things you just can’t do with bad credit.
The debt-free crowd will tell you it doesn’t matter, that you should strive to pay off all debt and not use borrowed money. It’s easy to think you won’t have to worry about your credit score but it’s not that simple.
I’ve been there after destroying my credit years ago on a few missed payments. It felt like I was locked out of any important financial decision and there was nothing I could do about it.
It’s not a fun place to be.
Whether you are trying to keep your credit score strong or are already battling back from poor credit, watch for these five hurdles of bad credit.
Check out this infographic of how bad credit can affect your life. Make sure you scroll down further for details and how to improve your credit score fast.
Feel free to share this infographic or use it on your website, please just add a link to: http://www.peerloansonline.com/things-cannot-do-bad-credit-problems
Try Buying a House on Bad Credit
Trying to buy a house on bad credit has become nearly impossible since the housing bubble popped. Traditional banks and mortgage lenders all but cut off credit to sub-prime borrowers after nearly going bankrupt on foreclosures.
The lack of mortgage options for bad credit borrowers got so bad that the Federal Housing Administration (FHA) created a new program for people with poor credit scores. Borrowers with a credit score of 580 or higher on the FICO scale only need to come up with a 3.5% down-payment.
Miss that credit score cutoff though and even the FHA requires a 10% down payment on your loan. The FHA also requires a debt-to-income ratio of less than 43% meaning your monthly debt payments can’t be more than $4.30 for every $10 you make each month. Check out these six tips to getting a home loan on bad credit.
It’s a good program for bad credit borrowers but there is still a huge problem…it does nothing for the interest rate you get on your bad credit mortgage. Even if you are approved for a mortgage, the bank is going to calculate a rate depending on your credit score.
The median home price of $189,000 works out to a loan of $182k if you pay the 3.5% down. The monthly payment for good credit borrowers works out to about $1,424 for a 15-year mortgage at the current 3.15% rate and including mortgage insurance. That monthly payment rockets to $1,691 per month for bad credit borrowers on a 6% rate.
Besides the hundreds extra you’ll pay each month, you’ll pay double the amount in interest over the life of the loan…an extra $47,943 over 15 years.
On top of the higher monthly payment on the interest rate, you’ll have to pay mortgage insurance that can add hundreds a month to your payment on an additional rate of up to 1% your loan amount.
The most likely outcome is that the bank is going to look at the monthly mortgage payment amount, including insurance, and decide that you won’t be able to make payments. Even with the FHA backing, many bad credit borrowers just can’t get a mortgage because of sky-high interest rates.
If you are able to get a loan, make sure you insure your home. Uninsured emergency repairs can quickly send you into a debt spiral and ruin your credit. Click for up to $509 in coupons and savings from Liberty Mutual.
Potential Landlords Will Check Your Credit
Ever wonder why you need your social security number in applications to rent a house or apartment?
It’s because landlords check your credit before they sign that rental agreement. Besides your credit score, they’re looking for how you pay your bills and how often you miss payments. Most potential landlords won’t come right out and tell you they are checking your credit or say they denied your application because of a bad credit score but it happens all the time.
And because it is impossible to prove that you were denied a lease because of your credit, there is really nothing you can do about it. Property management companies don’t want to take the risk that they will have to chase after tenants for rent so they won’t take a chance on you if your credit history isn’t stellar.
Even if you manage to squeak by with less-than-perfect credit and rent a place, you may be required to put down a higher security deposit or even pay more in rent.
Can’t buy a house on bad credit, can’t rent a place…can bad credit make you homeless?
Start improving your credit now with a debt consolidation loan. Get one loan to pay off your high-interest debt. You’ll save on interest payments and start building your credit score.
Want a Good Job? Get Good Credit First
Employers aren’t legally allowed to make a hiring decision on your credit score but they can look at your credit report.
Potential employers are looking through your credit report to get a sense of your financial responsibility. If you’ve missed payments or haven’t followed through on your credit agreements, will you follow through with your responsibilities at work.
Just as with renting a place, most employers won’t come right out and say that they denied you an interview based on your credit report. It leaves them open to too many potential legal problems so instead they will just say they found someone more qualified.
A history of not making payments or bankruptcy can sink your chances especially for management jobs and anything in finance. Even in jobs that you wouldn’t expect to care about your bad credit, employers won’t hire you if they think your money troubles could start causing problems at work.
Getting a Cell Phone Contract with Bad Credit, or Not
Are you starting to see a trend? Basically, any time you go to sign a long-term contract that requires monthly payments, you probably are not going to be able to with bad credit.
The cell phone companies give juicy rebates to retailers like Best Buy and WalMart for those free or discounted phones you get when you sign up for a long-term contract. Verizon doesn’t want to be out the money if you don’t keep up with your monthly payments though so isn’t likely to extend those sweet deals to people with bad credit.
You can still get a pay-as-you go plan with poor credit but get ready to pay hundreds for that new smartphone.
Besides just not giving you the best deal on contracts if you have bad credit, cable and other companies are allowed by the Federal Trade Commission to charge more for what they call risk-based pricing. This is going to be an additional fee they charge because of your credit report. Sprint charges an additional $7.99 on this risk-based pricing and I’ve seen companies charge up to $15 extra a month on this bad credit fee.
Fair? Hell NO! But it’s all completely legal as long as they send you a notice about the additional fee.
Your Bad Credit Will Cost You Higher Insurance Premiums
Insurance companies use a study from the 90s to justify charging more to people with bad credit. Nearly all of auto insurers (95%) and 85% of homeowner insurers use what is called credit-based insurance scoring to determine your premiums.
According to the National Association of Insurance Commissioners (NAIC), insurance companies look at five areas in your credit report to calculate your credit-based insurance score.
- Payment History (40%) – How often you make on-time payments
- Outstanding Debt (30%) – How much debt do you owe
- Credit History (15%) – The length of time you’ve had credit accounts
- New Credit (10%) – Applications for new loans you’ve made recently
- Credit Mix (5%) – The type of credit you owe including mortgages, credit card, car loans
These factors are basically the same as those used to calculate your credit score. Insurers are not allowed to discriminate based on your credit score alone so they’ve found a way around it by saying they look at the factors instead of your FICO score.
Either way, it means you won’t be getting the cheapest premiums on insurance with a sub-prime credit score. Worse still is that you are required by law to carry some types of insurance so you really have no choice but to pay the higher bad credit fees.
As bad as all those financial things you can’t do with bad credit…there’s one more reason to protect your credit score.
Relationships and Bad Credit
Money is the single biggest cause of stress and arguments in a relationship. A survey by SunTrust Bank found that 35% of couples list money as the primary reason they argue.
That’s for all couples in general. Things can get even worse for families where one partner has bad credit. That bad credit score is going to hang like a noose around your neck and will follow you every time you try to get a loan together.
The problem is that most lenders will use an average of your scores when a couple fills out a loan application. Even if your partner has a stellar score of 750 FICO, your score of 550 will drag the average down to 650 and you might not get the loan. That’s a hard blame to bear every time you get into an argument about money.
The good news is that bad credit isn’t forever. Monitoring your credit score and making on time payments can help you improve your score in less than a year and even people with bankruptcies can get approved for some loans within a couple of years. Try not to focus on what you can’t do with bad credit if you’ve already missed a few payments. Do what needs to be done to fix your credit score and get out from the bad credit trap.