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3 Little-Known Consequences of Having Poor Credit

Your credit score is a rating of how likely you are to pay back money you borrow. Scores range from 300 to 850, with 670 and higher being considered good credit.

You might already know about some of the consequences of a low credit score. Loans will cost you much more, because you'll be charged a higher interest rate. You also probably won't qualify for any of the best credit cards, and these are the ones that have the most benefits.

If you don't have any pressing need for a credit card or loan, those may not be a big deal to you. But your credit score isn't just used when you borrow money. There are quite a few other situations where it comes into play, including in your everyday life.

To understand why good credit is important, here are the drawbacks of a low credit score that many people don't know about.

1. You could pay more for insurance

In most states, insurance companies can and do factor in your credit score when setting your rates. They do this because research has found that people with lower credit scores file more insurance claims, on average. If you have a low credit score, you're considered a higher risk.

A low credit score could lead to paying more for auto insurance and homeowners insurance. It's usually not just a few extra dollars, either. The average cost of car insurance is more than twice as much for drivers with poor credit as it is for drivers with excellent credit. Drivers with poor credit pay $2,109 more per year for their auto insurance.

2. It may be harder to rent a home

As you probably know, your credit score is extremely important when buying a home. Mortgage lenders use it to set interest rates, so poor credit can cost home buyers hundreds of thousands over the life of a mortgage.

But your credit score can also be a key factor when renting a home. Many landlords and property management companies run a credit check on rental applicants. If you have a low credit score, you may not meet the requirements for the home you want. Or, if there's competition for a place, the owner could use credit scores as a deciding factor.

Even if you qualify for a rental with a low credit score, the owner might want a larger security deposit. If someone with excellent credit only needs to pay a deposit of one month's rent, someone with poor credit may need to pay double that, depending on the landlord and the laws for that area.

3. You could be required to pay a deposit for utilities

When you set up utilities at a new home, you need to apply for service. This is technically considered a credit application, so getting gas, water, and electricity service normally requires a credit check. With electricity, for example, the power company lets you use electricity and bills you based on how much you use.

Utility companies often require that applicants with low credit scores pay a deposit upfront to receive service. That way, if you don't pay your bill, the company can cut service and use the deposit to cover what you owe. Applicants with high credit scores normally don't need to worry about paying a deposit.

How to improve your credit score

Good credit makes life a lot easier and less expensive. If you don't have a high credit score yet, here's how you can improve your credit:

  • Always pay your bills on time. Your payment history is the most significant factor in your credit score. It's especially important to pay credit cards and loans on time, as they're reported on your credit history.
  • Don't overspend on your credit cards. If you use too much of your credit limit, it can hurt your credit score. It's better to keep your credit utilization (the portion of your credit limit that you use) below 30%. For example, if your card has a $10,000 credit limit, aim to keep the balance under $3,000.
  • Review your credit report at least once per year. You can request this for free at AnnualCreditReport.com. Credit reporting errors can negatively affect your score. It's important to review your credit report so you can catch and dispute any errors.

Anyone can build credit and achieve a high credit score. It doesn't happen overnight, but if you follow those habits, you'll be well on your way.

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