The costs of bad credit
Q. My credit score is not so great; help me understand the full implication of that fact?
A. This week is Consumer Protection Week and a good time for your question. Better Business Bureau often reminds consumers that bad credit can cause problems in many ways.
Credit.com is BBB A+ rated. Their definition is that credit scores represent a person’s credit worthiness, designed to show lending institutions who is a good investment, and who is not.
Banking institutions believe that credit scores, which reflect past financial behavior, are a good indication of an individual’s financial future. Therefore, the negative effects of having bad credit are undeniable.
Here is a list of things that become more expensive or even unattainable if you have bad credit:
› Insurance carriers in 47 states, including Tennessee and Georgia, check your credit score when arriving at a rate. They are assuming your credit score will indicate how risky of an investment you are. This means you may have higher than average rates for years or that you may not be approved for insurance coverage by a certain carrier. This is determined by how low your credit score is.
› Financial institutions look at your credit score during the mortgage application process. Bad credit means possibly being denied a loan or can result in being charged higher interest rates. This is because the amount of interest you pay is based on your level of risk and the current market rate. Lower credit scores, the higher the level of risks which translates to higher interest rates. This difference can amount to tens of thousands of dollars over the course of a mortgage’s term.
› If you have a low credit score and are approved for a credit card, you can expect higher than average interest rates. Typically credit card interest rates range from 7 percent to 36 percent. With a good credit score, you can expect to land somewhere between 10 percent and 19 percent. Remember that with high credit scores, you may also negotiate low interest rates. With a bad credit score, you can expect the average rate to be approximately 22 percent and up.
› If you require a loan when purchasing an automobile; banks will check credit scores before approving financing. Based on credit scores, interest rates on your loan will increase by several percentage points.
› Cell phone carriers, like car insurance carriers, check your credit score.
› Under the Fair Credit Reporting Act it is legal for a future employer to review your credit report with your written approval (they do not check your score). Hiring managers can use this information when making their decision. Some states do have laws that limit the use of credit information in the employment hiring process.
In order to manage and ensure your credit does not interfere with those types of financial transactions, BBB recommends taking control of the situation by obtaining your free credit report from AnnualCreditReport. com. This report is free and may be issued annually.
To report and view fraud and scam activity in our area visit bbb. org/scamtracker.
Jim Winsett is president of the Better Business Bureau in Chattanooga.