4 Ways Bad Credit Can Come Back to Bite You

Think your bad credit is no big deal? Think again.

Your credit history stays with you from the moment you open your first credit card or take out your first loan until the moment you die. You can't get rid of it, and so you must make sure that it portrays you in a positive light. Even if you don't intend to borrow money often, a poor credit score could still hurt you in other ways. Here are a few ways bad credit can make your life difficult.

1. Denied loan and credit card applications

Lenders are hesitant to work with individuals with poor credit because their low score indicates that they have not been responsible with money in the past. There's an increased risk that they won't be able to pay back the money, so many lenders just refuse to work with them at all. 

This is problematic when you want to finance a large purchase or need money quickly. Some would-be borrowers with poor credit turn to costly alternatives, like payday loans, that have less stringent qualification requirements, but these often make debt problems worse instead of better.

2. Higher interest rates

If lenders approve borrowers with fair or poor credit, they'll usually charge them much higher interest rates than they would borrowers with good or excellent credit. The lender is taking more of a gamble on those with poor credit, so they want a bigger payout from it. If the borrower is unable to keep up with the payments, the lender won't lose quite as much money because they'll have received more money in interest each month than they would from a borrower with good credit.

Your interest rate will vary depending on how poor your credit is and the type of loan you're trying to take out. Unsecured loans, like personal loans, usually have higher interest rates than secured loans, like auto loans or mortgages, because there are no assets the lender can seize if you fail to pay.

3. Difficulty getting a job or apartment

Increasingly, employers are checking prospective employees' credit reports, especially if the position they're applying for involves managing company or client funds. Some also consider it to be a general measure of responsibility. Landlords may also perform credit checks to screen prospective tenants, and bad credit could cause them to turn you away.

No one can pull your credit report without your permission. But if you refuse the credit check, you're unlikely to get the job or the apartment because the employer or landlord might think you're trying to hide something.

4. Required utility company deposits

You probably don't think of utilities as being a form of credit, but they are, in a way. Utility companies provide you with services on the understanding that you will pay for them at the end of the month. If you fail to pay what you owe, they can't take back the services they've already provided and might need to employ a collections agency to get any money from you. 

Individuals with poor credit may find that utility companies charge extra to set up an account. If your credit score is low, they may ask for a security deposit in case you fail to pay your bill. Or you may need to find a cosigner who agrees to pay your bill if you are unable to do so.

How to improve your credit

You may already be dealing with these hassles if your credit is bad, but it doesn't always have to be this way. You can raise your credit score over time by demonstrating responsible behavior. If you have negative marks, this may take a little while as most of them stay on your credit report for seven years.

Paying on time is the most important thing you can do because payment history is the biggest factor in your credit score calculation. Start with any existing utility or credit accounts that you have. You could also consider opening a secured credit card. This is just like a regular credit card, except that you must put down a security deposit to open your account -- often just a few hundred dollars. Your credit limit will equal your security deposit and the regular payments you make will help to build your payment history. If you later decide to close the account and you're not carrying a balance, your card issuer will refund your deposit.

You should also aim to reduce your reliance on credit. Build up an emergency fund to cover unplanned expenses so you don't need to resort to using a credit card or taking out a loan. You should also try to use 30% or less of your credit limit each month. Using more than this tells lenders that you need a lot of credit to support your lifestyle and raises concerns about your financial stability.

Don't close old credit cards unless they charge you an annual fee because this will lower your average account age, and avoid applying for new credit unless you feel confident that you'll be approved. Beyond that, you need to stick with it and trust that your efforts will pay off in time.