6 Side Effects of a Low Credit Score

Credit plays a major role in many aspects of life—possibly in areas you’ve never considered. From access to loans and higher interest rates to housing and employment options, understanding how credit affects your life is an important step on the path to financial stability.

A lower credit score can create a ripple effect and potentially lead to:

1. Difficulty securing a loan—Before a financial institution or lender approves a loan, they will want to assess your creditworthiness—or, more simply put, how likely you are to pay the money back. The most common way to make this assessment is to evaluate your credit score, which is calculated based on information from your credit report and overall history of on-time payments.

   Whether you’re looking to buy a new car or finally purchase your dream home, you will most likely need a loan. A lower credit score can limit the loan options available to you and may impact whether you qualify. Your credit score will also directly impact the amount for which you qualify even if you’re confident you can afford the payments.

2. Higher interest rates—Once you qualify for a loan, your credit score will be a key factor in determining the interest rate. To mitigate the risk of defaulting on the loan, lenders will charge a higher interest rate. This means as a borrower, you will pay more over the life of the loan. For longer-term loans, like mortgages or auto loans, even a small interest rate increase could mean a significant hike in your payment amount.

3. Fewer rental options—Just like financial institutions, landlords want to assess your creditworthiness to gauge how likely you are to pay your rent each month. This may limit your housing options or make it more difficult to live where you want. Although you typically wouldn’t use credit to pay rent, your credit score is often used to determine your overall financial responsibility.

4. Higher insurance costs—Many insurance companies use credit scores, claims history and other factors to determine insurance rates. This analysis can be used for auto, mortgage as well as other types of insurance coverage. To get lower insurance rates and better payment plans, make sure your credit score is up to par.

5. Impact on employment opportunities—Although prospective employers don’t have access to your credit score, many run background checks during the hiring process. This typically includes a credit check. Keep in mind, employers are required to get your permission before doing a credit check and not all employers will consider credit history during the hiring process. This will likely only be a factor for positions involved with handling money for the organization.

6. Higher expenses for utilities—When you move into a new apartment or home, one of the first things on the to-do list is to set up utility service accounts for power, gas, water, sewer and internet. Customers with lower credit scores may be required to pay a deposit when setting up these new accounts, which acts as insurance for any outstanding balances.

What classifies as a low credit score?

A credit score of 579 or less would give you the classification of risky borrower and may not allow you to qualify for the loan or interest rate you want. However, this doesn’t mean that all is lost. There are some loan products made for these credit scores—like an FHA mortgage loan. Check with your financial institution to see what options are available.

How can I improve my score?

Credit scores impact more than just your loan payment. Understanding how they factor into other aspects of your life can help you streamline your financial habits. If your credit score is keeping you from living the life you want—or it’s just raising your overall expenses—don’t worry! Here are some things you can do to improve your score:

• Pay your utility bills on time.
• Don’t close old credit accounts.
• Don’t neglect parking tickets or library fines.
• If you tend to move often, establish a P.O. Box to show stability.
• Resolve delinquent payments.
• Raise your credit limits—but only if you can resist the temptation to spend the additional credit.

If your credit score is still not quite where you would like it to be, there are still more things you can do. Consider debt consolidation to help you raise your score. Mountain America Credit Union offers a free debt rescue program to provide members with an overview of their particular loan and payment situation. This program can show you where you might be able to save on interest or secure a more favorable loan term to pay off debt faster. Consider scheduling an appointment with a loan officer at a branch or call our service center for a clearer picture of how debt consolidation can help you.

Need more help? Meet with a Mountain America financial guide to receive guidance for improving your financial life.