back

The consequences of bad credit  

consequences of bad credit

One of the most common consequences of bad credit include having difficulty finding approval for loans. Furthermore, bad credit borrowers who are able to find loan approval are usually only eligible for high-interest funding, low loan amounts, and a limited type of financial products.
There are many consequences of bad credit, and none of them are good. Financial stress can impact every area of your life. You’ll have a tougher time getting a personal loan, renting an apartment, or keeping healthy relationships. 

FICO credit scores are grouped into five different categories:

  • Exceptional credit: 800+
  • Very good credit: 740 to 799
  • Good credit: 670 to 739
  • Fair credit: 580 to 669
  • Poor credit: 579 and lower

However, bad credit doesn’t have to keep you down forever. A few changes and consistency can have a positive, long-term effect. Here’s what you need to know about some of the biggest side effects of bad credit and what you can do about it.

1. Marriage Struggles

Financial stress is one of the main sources of tension in marriages. A study by the National Library of Medicine found that there were long-term consequences of financial stress in a marriage, manifesting in both mental and physical health issues for both parties.1 

TIP: Surround Yourself with Inspirational People. 88.6% of American adults impulse shop.2 Talk to a financial coach. Retail therapy doesn’t actually help and a professional can help sort your finances and make those impulses less tempting. This can also help with communication and making sure you and your spouse are on the same page. 

2. Physical Ailments

Stress is known to cause headaches, heart disease, high blood pressure, weight gain/loss, and stomach issues.3 Stress can often be found as the underlying issue of so many of the illnesses we face today. 

TIP: Declutter Your Budget – 11 million Americans do not monitor their spending.4 Take back control. Know what you’re spending and why. Categorize your debt and tackle the smallest to give yourself a quick win to build those habit-forming positive feedback loops. 

3. Mental Health Struggles

Poor financial health often creates a cycle that leads to poor mental health, which in turn leads to even worse financial health … and on and on it can go. 

TIP: Unplug from Social Media. 65% of Americans say using social media has harmed their mental health.5 Social media is a trigger for comparison, enticing you to spend money to “keep up”. Reduce your social media time to 30 minutes/day and turn off all notifications. 

4. Social Isolation

Financial stress and hardship can lead to feelings of shame and self-loathing, which may encourage the bearer to pull away from friends and family, or see social interactions in a negative light. 

Dr. Robi Ludwig, Psy. D says, “Finances feel like a very private issue and are often associated with a person’s sense of success or failure. Because of this, many feel this type of hardship is confidential.”6 

TIPt: Level Up Your Mindset.Personal finance is 80% behavior and only 20% head knowledge.”7 Take some time to journal about your relationship with money, your thinking patterns, belief sets, and how your parents handled money when you were younger for insight.

5. Depression

A recent study shows that there is a clear association between financial stress and depression.8 It didn’t matter if classified as high, mid, or low-income. 

TIP: Conquer The Unknown. 1 in 4 Americans have no emergency savings.9 Build an emergency fund. Having a plan when something goes wrong means not continuing the debt cycle and building in margin so that you’re able to face the unknown with hope. 

6. Fear of the Future

78% of Americans are living paycheck to paycheck.10 This means the majority are living on an edge where one decision or tough spot can end up being disastrous.

TIP: Reduce Your Fear of the Future. Only 52% of Americans hold investments.11 Start investing. Plenty of apps can teach you how to invest and where, even if you don’t have a lot to start with.

7. Insomnia

Stress can easily lead to a lack of sleep. We already know that less than 20% of Americans are getting a full 8 hours of sleep.12 Yet it’s also common knowledge that sleep is known to be one of the best ways to ensure your immune system stays healthy, your hormones are regulated, your mind is clear, and you’re better able to deal with the stressors of the day—including making healthy financial decisions. 

TIP: Practice Gratitude. 5 minutes of daily gratitude will make you 25% happier and reduce stress levels.13 Start a gratitude journal and learn to be content with where you’re at. Keeping up with the Joneses will keep you in the stress loop. 

8. You’re a Loan Risk

A bad credit score almost guarantees trouble getting a loan, be it a car loan, mortgage, or credit card. Those lending you money want to know that eventually, you can pay them back. Even if you do qualify, you may end up having to pay higher rates as you would be qualified as a “default risk.” 

And renting may not be any easier. Most rental companies will also request a credit check

TIP: Improve Your Low Credit Score

  • Set up automatic payments so your bills are always paid on time
  • Don’t apply for a loan or card that you aren’t sure you will qualify for
  • Check your credit report for errors and dispute if necessary
  • Look at your Credit Utilization Rate and work to keep it below 30%
  • Consolidate your debts and stick to a repayment plan

9. Delayed Retirement 

Baby boomers carry an average total non-mortgage debt of $25,812.14 To enter retirement would mean either less to live on as a significant portion of retirement funds would go towards paying down debt every month or it could mean draining retirement accounts much faster than planned. 

TIP: Make Some Lifestyle Changes. Look at what you can sacrifice now to get debt paid off faster, focusing on credit cards and car loans. If necessary, you may need to consider working longer, allowing you the chance to truly enjoy your retirement.

10. Life Interruptions 

Whether cell phone contracts, apartment rentals, or even jobs—bad credit can lead to being denied or charged extra in many essential realms of life.

The average FICO Score in the U.S. rose to 714 in 2021.15 When you see those great deals advertised, you’ll often also see “available to qualified customers.” T

IP: Start With Automatic Payments. For recurring payments, like cell phone bills, set up automatic payments. It seems simple but will make a big difference in the long run, both with your credit score and your mental health.

How to Break the Bad Credit Cycle

The majority of those with a bad credit score are aware of it but don’t improve the situation because they’re caught in a cycle. 

Credit is self-policing. Small errors or oversights like paying less than the minimum payment or missing the due date by a few days can make a big difference down the road.

Step One: Reset. Speak with a credit counselor or debt attorney. 

Step Two: Get out of the credit game for a while. Put your credit cards away and pay cash for things. Delinquencies will drop from your credit record after 7 years. 

Step Three: Save an emergency fund so that unforeseen costs don’t result in perpetuating the cycle. 

Step Four: Tackle debt. Dave Ramsey suggests starting with the smallest amount first.16 This gives you an easy win and will help build the positive feedback loop you need to secure a habit. 

Creating a Self-Care Routine for Decreased Stress

Self-care is important. We all know that. We build mindfulness habits into our routines to take care of ourselves, our families, and our homes. But what about a financial self-care routine and using mindfulness to be more aware of our spending and saving habits? 

Setting aside 30 minutes a week to take care of your finances will bolster the care you take of your mental, emotional, and physical health. 

Take some time to think about your relationship with money, your thinking patterns, belief sets, and how your parents handled money when you were younger. Doing so will give you insights into why you feel the way you do. 

When building your routine, consider: 

  • 10 minutes a week checking your bank accounts
  • Go over all bill due dates and payments that are not automated
  • Set up and track financial goals
  • Pay credit card bills
  • Review your budget

Financial trauma is a real thing. But financial stress and the side effects of bad credit don’t need to have the last word. Taking care of your mental and physical health is paramount; everything else flows from that. You can turn things around by implementing small, actionable steps with consistency. 

Taking the time to set up a 30-minute weekly financial self-care routine that will allow you to feel more in control and implementing a few practices that will release some tension may be just what you need to finally kick financial stress to the curb. 

FAQ: Consequences of Having a Bad Credit Score

How does a bad credit score affect my interest rates on loans and credit cards?

A low credit score often leads to higher interest rates on loans and credit cards. Lenders view a low credit score as a sign of higher risk and compensate by charging more in interest.

Can bad credit lead to higher insurance premiums?

Yes, many insurance companies use credit scores to determine premiums. A poor credit history can result in higher insurance premiums, as insurers may consider you a higher risk.

What impact does my payment history have on my credit score?

Your payment history is a crucial factor in determining your credit score. Late or missed payments can significantly lower your score, as they indicate a higher risk of default to lenders.

How important is a good financial history for personal finance management?

A good credit history is vital for personal finance management. It helps in securing loans at favorable rates, reduces the need for high security deposits, and generally improves financial flexibility.

What are the effects of a bad credit score on security deposits for utilities or rentals?

If you have a poor credit history, you may be required to pay higher security deposits for utilities or rental agreements. Landlords and utility companies view this as a safeguard against potential defaults.

Does having a bad credit score affect the interest rates on car loans?

Yes, with a bad credit score, you are likely to pay higher interest rates on a car loan, as lenders consider you a higher risk borrower.

How does a credit utilization ratio affect my credit score?

Your credit utilization ratio – the amount of credit you use relative to your credit limit – significantly impacts your credit score. High utilization can lead to a lower score, as it suggests financial strain.

What role do the three major credit bureaus play in determining my credit score?

The three major credit bureaus (Equifax, Experian, and TransUnion) collect and maintain financial data about individuals, which is used to calculate credit scores. They track your credit history, including payment history, credit utilization, and other factors.

Can having a lower credit score limit my access to certain financial products or services?

Yes, a poor credit score can limit access to certain financial products like premium credit cards, personal loans, or mortgages. Lenders may deny applications or offer less favorable terms.

How long do late or missed payments stay on my credit report?

Late or missed payments typically stay on your credit report for up to seven years. This can have a long-term impact on your credit score and your ability to obtain credit.

Is it possible to rebuild a poor credit history, and how long might it take?

Yes, it’s possible to rebuild a poor credit history. This process involves consistently making payments on time, reducing debt, and being cautious with new credit. The time it takes varies, but you can see improvements within a few months to a year, though completely rebuilding your credit may take longer.

A Word From CreditNinja About Bad Credit 

Understanding your debt and the debt cycle is the most important step to getting out of it. To get out of debt, CreditNinja suggests you try tactics such as: 

  • Pay more than your minimum amount due.
  • Try repayment strategies such as the avalanche or snowball methods.
  • Try a debt consolidation loan or a credit card balance transfer. 

Ready to learn more about improving your credit score, getting bad credit loans, and handling your finances? Head over to the CreditNinja dojo for hundreds of free resources available to everyone 24/7!

References:

  1. https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8425299/
  2. https://www.finder.com/impulse-buying-stats
  3. https://www.betterup.com/blog/financial-stress#:~:text=Unexplained%20aches%2C%20pains%2C%20and%20physical,sleep%20or%20eating%20healthy%20meals
  4. https://financialpost.com/uncategorized/financial-literacy-survey-finds-silver-lining-in-financial-crisis
  5. https://www.onlinetherapy.com/6-in-10-americans-say-social-media-negatively-affects-their-mental-health/
  6. https://www.pbs.org/wnet/chasing-the-dream/2020/04/financial-and-emotional-consequences-of-a-pandemic/
  7. https://www.ramseysolutions.com/business/helping-employees-overcome-financial-stress
  8. https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0264041
  9. https://www.businessinsider.com/1-in-4-americans-no-emergency-savings-survey-2021-7?r=US&IR=T
  10. https://press.careerbuilder.com/2017-08-24-Living-Paycheck-to-Paycheck-is-a-Way-of-Life-for-Majority-of-U-S-Workers-According-to-New-CareerBuilder-Survey
  11. https://www.pewresearch.org/short-reads/2020/03/25/more-than-half-of-u-s-households-have-some-investment-in-the-stock-market/
  12. https://www.duffyduffylaw.com/employee-health/
  13. https://www.inc.com/marla-tabaka/giving-thanks-can-make-you-happier-according-to-years-of-research.html
  14. https://blog.massmutual.com/retiring-investing/debt-retirement-prevent
  15. https://www.experian.com/blogs/ask-experian/what-is-the-average-credit-score-in-the-u-s/
  16. https://www.ramseysolutions.com/dave-ramsey-7-baby-steps
  17. https://www.sciencedirect.com/science/article/abs/pii/S0272735813001256?via%3Dihub
Read More
average apr for personal loan
The average APR for a personal loan will depend largely on your credit score and the lender you choose to work with.  A personal loan is…
best credit building apps
The best credit-building apps give borrowers the tools they need to improve their credit and spending habits. If you have bad credit, you may be…
best budget apps
The 10 best apps for budgeting include Mint, PocketGuard, and others. However, you may ask, “How can I find the best free budgeting app?” The…
credit score needed for a construction loan
While there is no one credit score that is required for construction loan approval, lenders typically tend to favor applicants with higher scores and a…

Quick And Easy Personal Loans Up To $2500*