1. Unnecessary Fees
Want to take your credit to the next level of bad? Pay all of your bills late - or better yet - just don’t pay them at all.
That’s pretty solid advice for worsening your credit score, but it’s the opposite of what you should do.
Unfortunately, a lot of people routinely leave bills unpaid or submit them late, and while it’s understandable that it happens sometimes, doing so can act as a catalyst to bad credit, and leaves less money for you to save in the long run.
When I got my first credit card in college, I would miss payment deadlines every now and then - even though I had enough to cover the full amount - simply because I was super busy and didn't prioritize it. I didn't think it was that big of a big deal, but wow(!) was I wrong. Instead of taking myself out for a nice meal, I was paying late fees of $9 - $39 EACH TIME to my credit card company. I ended up losing so much money in fees that I could have used on something else!
The solution? I needed to set up a schedule.
It's one of the easiest ways to stop the cycle of late or missed payments and only takes a few minutes to do.
Use Google Calendar to set reminders and alerts for payment due dates and if possible, automate payments for any regularly occurring fixed amounts like car payments, phone bill, etc.
2. Interest Rates
It's crazy to me that companies are allowed to judge your level of responsibility based on a simple credit score but here's the reality:
A "high risk" person = high interest rates.
“High risk” can be anything from large amounts of consumer credit, student debt, fixed loans, or other forms of borrowed funds resulting in a low credit score. Essentially, if your accounts are seen as high risk, you’ll pay higher interest rates over time.
What does that actually mean? Think of it like paying more for any and all purchases over time.
EXAMPLE 1: $400 TV
If you get a great deal on a TV for $400, but don’t take steps to pay off the credit card balance quickly, you could actually end up paying more for the TV than the original cost due to high interest rates.
Let's say you only pay the minimum $10 a month and your card has APR 13%. You'll pay $127 just in interest, plus the $400 for the TV.
If you have poor credit, your APR will likely be higher, say 25%. At that rate, you'll actually pay $469 in total interest, plus the $400 for the TV. Crazy!
EXAMPLE 2: AUTO LOAN FOR $10K
Let's say you're buying a car and are approved for a $10,000 auto loan. Based on your credit check, you're given an interest rate of 5% and must pay back the loan over the course of 5 years (60 months) which is pretty typical for this type of loan. Factoring in simple interest, you'd pay $1,322.74 on top of the original $10,000 loan you took out.
Someone with higher credit borrowing the same amount for an auto loan with 2% interest would pay $516.66.
Sure you'd rather watch Netflix all day than deal with these numbers, but it’s just the reality of high interest rates. A higher rate here or there can add up to a lot of money, so it’s important to raise your credit score as much as you can, no matter your situation. This could help.
3. Insurance Premiums
If you’re like me, you probably hate picking out insurance terms and you definitely don’t love paying for them.
While the different types of insurance are best saved for a longer article, the amount (AKA “premium”) you’re required to pay typically depends, at least in some part, on your credit. This goes back to the previous point of being seen as a high risk to insurance companies.
Insurance itself is the business of risk and having poor credit can really hurt your credibility and premium options.
Take, for instance, someone looking to buy a house. According to a study published by InsuranceQuotes.com, a homeowner with poor credit will pay 91 percent more for homeowners’ insurance than someone with excellent credit. Seriously, over 90% more than other homeowners’ for the same service!
If your monthly rate for homeowners insurance is 3.5% of your home's value, and your home is worth $150,000, you'd pay $5,250 a year for coverage. But, if your credit was higher, you may get a better rate at the current national average of 2.24%, which would drop your annual premium down to $3,360. Translation: a higher credit score could put $1,890 back in your pocket every year.
In some ways, it seems unfair, but unfortunately, the cost of your premiums are up to the insurance companies. However, if you’re planning to buy a home in the next 5 years or so, there are steps you can take to plan ahead to raise your credit score now.
4. Credit Card Rewards (or lack thereof)
Consumers with excellent credit scores tend to have access to credit cards with the best cash back offers, travel rewards programs, and other money-saving deals. "Points" can be redeemed for free travel (hello free flights to Hawaii), free hotel nights (I love you, Hyatt) and even free gift cards (Christmas is coming!).
By overlooking your credit score, you could be losing a serious amount of money on everyday purchases, which isn’t ideal.
Here are just a few credit cards for people with excellent credit:
Chase Sapphire Preferred® - cardholders earn 2x points whenever they use their card to pay for dining and travel purchases, and 1 point on everything else.
Citi® Double Cash Card - rewards customers twice by giving them 1% cash back when they buy an item, and another 1% when they pay it off.
Blue Cash Preferred® from American Express - cardholders earn 6% cash back on groceries, 3% at gas stations and some department stores, and 1% on everything else
The potential savings and rewards sound awesome, right?
Rest assured, these examples aren't highlighted to make anyone feel bad, but rather to encourage you to work on raising your credit score to get in on these deals and make your money work harder for you.
An easy way to jumpstart your credit is to actually use credit cards. It may sound counterintuitive at first, but by purchasing items with a credit card, you show credit card companies that you’re responsible and that they’re able to take a risk on you - which, in turn, raises your credit score.
5. Future Jobs
Would it surprise you to know that nearly half of employers request to review an applicant’s credit report to gain insight into how responsible they are with money?
It can be scary to think about losing a potential dream career opportunity to bad credit, but it does happen.
One woman recounted her experience of being denied for a management job at a car rental firm due to her credit history.
"I made it through the third and final interview...but the very next day [was] called [and told] I did not pass their minimum required credit history."
"Imagine...my surprise and humiliation. They never even checked any of my references, my qualifications, nothing."
It's really tough to face losing a job based on your credit score, but you can take control of the situation by focusing on your financial security and improving your credit over time. Things won’t change overnight, but by taking small steps to shift your credit score from “bad” to “good” and hopefully “good” to “great,” you can break the cycle of losing money to bad credit.
Have you had to pay fees on a credit card? Share your thoughts with us in the comments!