Updated & Verified: March 30, 2021
Your credit score can impact if you can buy a home or not
Table of Contents
- Credit Score Impacts
- How Does Your Credit Score Impact Your Life?
- Impacts of Bad Credit
- What Affects Credit Score the Most?
- What Types of Bad Credit Situations Stay on Your Credit Report for 7 Years?
- How Can I Improve Negative Credit?
Credit Score Impacts
Your credit score can significantly impact your life. The most common impacts are:
- Whether you can get or afford a mortgage
- Whether you can get a place to live
- Your ability to buy a vehicle
- Your access to convenience and necessities
Did you know, the average credit score in America is 711? (1)
Credit scores, among other things, are basically a measure of your financial health and trustworthiness. Credit scores determine a lot of financial opportunities that you can have in your life.
Credit as a concept has existed in some form or another in almost every society through history, but modern FICO credit scores first emerged in 1989 as a method for banks and creditors to determine eligibility for loans and other kinds of financial services. The idea behind a credit score is that it tells lenders how likely a borrower is to default on a debt. The higher the score, the more trustworthy you are considered. (2)
A credit score is very important for functioning in the modern world. As such, a bad credit score can seriously hurt your financial opportunities. So we want to talk about some important ways credit can affect your life.
How Does Your Credit Score Impact Your Life?
Whether you can get or afford a mortgage
Perhaps one of the most important things that a credit score affects is your ability to get a mortgage or home loan. Home loans are a big risk for lenders so they want to make sure that borrowers have good credit and can reliably make tier payments. (3)
And in some cases, even if you can secure a mortgage with poor credit, then you will most likely have less-than-ideal terms. A mortgage on poor credit might have very high monthly payments, a high-interest rate, or other negative conditions.
Whether you can rent
Many landlords will also check their renters’ credit along with income to make sure they can make monthly rental payments. It can be the case that you have a high income and might still get rejected from a rental application because your credit score is so low. Sometimes a landlord might accept you but charge a higher security deposit or higher monthly rent. In most states, there are no rules on when and how a landlord raises rent so if they run a credit check they have the right to charge more if they feel like a renter is a risk.
Your ability to buy a vehicle
Similarly, a poor credit score can affect your ability to get a car. Most people do not buy a car outright and instead get a loan. And as is always the case, getting a loan requires a credit check. Dealerships might reject a car loan if your credit is poor. You could also be accepted and have very poor loan conditions, such as a high monthly payment or high-interest rate. (4)
Your access to convenience and necessities
Bad credit can also affect your access to several basic necessities and commodities for convenience.
- Cellphones: Many cell phone carriers will do a soft credit check before allowing you to sign a contract. If you have poor credit, you might be rejected from an account or have to take a less advantageous plan.
- Checking and savings accounts: Most banks also perform a credit check when opening a savings or checking account. Generally, the required minimum credit scores are very low, but if your credit is poor enough, then you can get rejected from the application.
- Credit cards: One of the most common negative impacts of having poor credit is an inability to get credit cards. Many credit cards have minimum required credit scores. Lots of cards market themselves to those with poor credit but those almost always have undesirable terms like high interest rates and high monthly fees.
- Potential employment: In some cases, poor credit can prevent you from getting a job. This can be important in fields where workers frequently handle cash, corporate finances, or customer financial information. The idea is that applicants in financial stress (= bad credit) are more likely to commit theft or fraud of company assets.
- Insurance: Insurance will often check credit scores to determine principal payments and deductibles. A poor credit score can mean much higher principals and lower maximum coverages.
- Student loans: If you are thinking about going back to school then a poor credit score can affect student loan eligibility. You can get a lower loan amount or can be rejected entirely if you are judged as too risky to issue a loan.
- Utility accounts: Lastly, poor credit can affect your eligibility for various credit accounts, such as utilities. Utility services like power and the internet are practically necessary to function in the modern world.
Impacts of Bad Credit
It is hard to understate the importance of your credit score. Bad credit can affect your ability to engage in several things in life. Moreover, bad credit can become an inescapable cycle. Bad credit makes it extremely difficult to obtain credit accounts, which is how you are supposed to improve your credit. So bad credit can even prevent you from improving your credit in the future. (5)
What Affects Credit Score the Most?
FICO credit scores are affected by 5 main variables.
– Payment History (35%)
– Amounts Owed (30%)
– Credit History (15%)
– New Credit (10%)
– Types of Credit in Use (10%)
As you can see, the most important factors that determine credit score are payment history and the total amount owed. When it comes to payment history, making a payment late is bad, and the later the payment is, the worse your score will be. If you have charge-offs or instances of bankruptcies are also major factors that affect the overall score. And obviously, the timer elapsed since the negative infraction is considered as part of your credit history. (6)
The total amount owed is also important, but this figure is misleading at first. The absolute amount that you owe is not as important as the total proportion of your credit that you are using. For example, someone using $1,000 on a $10,000 limit card is probably in a better position than someone who is using $500 out of a $1,000 limit.
Other important factors include credit history, which is essentially how long you have had your credit accounts open. Many experts agree the optimal account age is 3-5 years. New credit accounts take into account how many account inquiries you have. Types of credit are based on how many types of credit accounts you are using, such as utilities, credit cards, loans, etc.
What Types of Bad Credit Situations Stay on Your Credit Report for 7 Years?
In general, most negative marks on your credit score will be removed after 7 years, though this is not always the case. When an item is removed from your score, it means that it will no longer be considered when compiling your report, not that your credit has been restored. The upshot is that positive information will stay on your credit score indefinitely, although closed credit accounts are generally discounted after about 10 years, depending on the type and size of the account. (7)
- Late payments: Late payments are one thing that will fall off approximately 7 years after the delinquency has occurred. This negative mark will fall off even if you are still using the credit account on which the missed or late payment was posted. In some cases, it may be possible to talk to your creditors and get a late payment removed from your record. For example, several credit card companies will remove a late payment mark if you have had a good payment record up until then.
- Collections or charged-off accounts: An account that has been sent to collections or been charged off will generally stay on your account for up to 7 years after the debt was charged off. Notice that this does not mean that your debt was forgiven. Often, creditors will hand off losing debts to collections agencies who might then try to collect on that debt. So even if a debt has been charged off, you may need to still negotiate a settlement, and the debt is not automatically forgiven.
- Bankruptcy: Bankruptcy is one of the few negative marks that will stay on your credit report for more than 7 years. In general filing chapter 7 bankruptcy will stay on your account longer and might be retained until 10 years after bankruptcy was filed. Chapter 13 bankruptcy might be discarded from your report depending on the amount and kind of debt. Note that with Chapter 13 bankruptcy, it might still be possible to improve your score by making timely payments.
- Negative account such as repossessions, foreclosures, & short sales:
Various other negative marks on your credit report will last for 7 years, such as foreclosures, repossessions, and short sales. In almost all of these cases, the negative market will be discarded 7 years after the negative situation occurred. Notice that evictions from rental properties are not reported on your credit report, but related issues such as missed rental payments, missed utility payments, and the like can negatively affect your credit score.
How Can I Improve Negative Credit?
Unfortunately, there is no real quick fix to improve your credit score. The only thing that can fix it is changing your financial habits and trying to get rid of any debts that you currently have. There is no quick solution, but we can offer some general tips on how to manage poor and negative credit. (8)
Eliminate Large Debts
The single most important thing you can do to improve your credit score is to try to minimize existing debts. There are two ways you can go about this: avalanche and snowball methods. With the avalanche method, you pay off the largest debt first, then move to the smaller one. With the snowball method, you start with the smaller debts and build up momentum to tackle the larger ones. Either way, minimizing your debts through making higher payments or cutting expenses elsewhere is a necessity to improve your credit score.
Reduce Credit Utilization
Another important factor is to lower the percentage of the total credit you’re using. Most experts agree that you should never have more than 30% of your entire credit balance tied up for an extended period of time. Having a little bit of usage on your account can be healthy, as long as it is managed properly and payments are made on time.
Limit Hard Inquiries
Hard inquiries for new credit accounts can have a small but noticeable impact on your credit score. When rebuilding your credit, try to minimize the number of credit lines that you apply for. This includes things like revolving credit accounts such as credit cards.
Beef Up Your Credit
In some cases, a person might not have enough information available to generate a FICO score. This does not mean that your credit is bad, only that there is not enough information to determine your credit. Various agencies have services to help people build up established credit such as Rent Track, which reports rental payments to credit agencies, or Experian Boost, which will send banking info to credit agencies so they can use those for credit reports.
Find a Credit Agency
If none of these options seem like they work, then contacting a credit repair agency might help. A credit repair agency can help you get negative items removed from your credit reports and help you put together a plan to manage further credit issues.
Credit scores are a hated but unfortunately necessary part of modern life. If your credit is low, then it can drastically affect various things in your life and prevent you from pursuing certain options. It is important to get a firm handle on your credit and take active steps to rebuild your score if it is negative. However, even if you cannot, negative credit marks are not permanent and they will eventually go away. Even something like bankruptcy will be irrelevant after a few years and you can still find positive ways to manage your credit in the interim.
1. Stefan Lembo Stolba, Data Research Insight Analyst, Experian – https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/
2. Rob Kaufman, Writer, myFICO – https://www.myfico.com/credit-education/blog/history-of-the-fico-score
3. Quicken Loans – https://www.quickenloans.com/learn/credit-score-to-buy-a-house
4. Stefan Lembo Stolba, Data Research Insight Analyst, Experian – https://www.experian.com/blogs/ask-experian/what-is-the-lowest-credit-score-to-buy-a-car/
5. Megan DeMatteo, Writer, CNBC – https://www.cnbc.com/select/side-effects-of-bad-credit/
6. Experian – https://www.experian.com/blogs/ask-experian/credit-education/score-basics/what-affects-your-credit-scores/
7. Equifax – https://www.equifax.com/personal/education/credit/report/how-long-does-information-stay-on-credit-report/
8. Kali Geldis, Credit.com – https://www.credit.com/credit-repair/how-to-improve-credit-score/