The Financial Effects of Bad Credit

Wooden stamp sitting next to red word

Good credit is a critical aspect of overall financial health. Without it, navigating some of life's basic functions can become considerably more difficult -- and far costlier as well.

With that in mind, let's review a few ways bad credit can wreak havoc on your finances.

It Can Make Getting a Credit Card Impossible 

If you want to rent a car, or pay for some emergency expenses that you can't afford out of pocket, the ability to access a credit card is essential. Poor credit, however, can put credit card eligibility out of reach.

It Can Make Starting a Business Impossible

Thanks to technology, the barriers to entry for startups have been lowered dramatically in recent years. Yet you can't start a new enterprise without funding. Most people don't have the cash on hand to start and support a growing business, so they apply for a business credit card or open a revolving line of credit at the bank.

If your credit isn't up to snuff, these options won't be available to you, potentially putting an end to your dream of owning a business.

It Can Put Securing a Mortgage out of Reach

Home ownership offers an array of great benefits. It provides you with a place to call your own, and it allows you to build vitally important equity -- something that typically has profound financial implications over one's lifetime.

If your credit is poor, however, the dream of home ownership may be deferred permanently. While there are FHA loans and other programs designed to help borrowers with suboptimal credit, most of these programs require a credit score north of 600, along with a substantial amount of money down.

You're Going to Pay Higher Interest Rates

Bad credit means that even if you can qualify for a credit card or a loan, you'll end up paying far more for the privilege. The difference between paying back a five-year car loan at near zero-percent interest and double-digit interest is enormous, for example.

Because it's nearly impossible to live in a consumer society without accruing debt, these higher interest rates will make the simple act of day to day living more expensive.

You May Have to Pay Deposits

If you have good credit and you want to have a utility or landline phone hooked up, the process is fairly painless. If you have poor credit, however, you won't always be so lucky. You may have to provide a sizeable cash deposit in order to secure service, or even find a co-signer to help you qualify.  

The Takeaway

Bad credit has enormous implications for your overall financial health and well-being. It can disqualify you for loans, prevent you from starting a business or buying a house, and make even simple tasks like signing up for utilities more difficult.

In order to avoid having to deal with such scenarios, it's important to take steps to improve your credit as quickly as possible.