Hidden Problems With Low Credit Scores

Unfortunately, our financial system is set up to encourage some level of credit and debt. In fact, those with low credit scores can find problems in other areas of their finances — even if they are generally responsible with their money. Here's what you need to know about the hidden costs of a low credit score.

Diligently working to improve your credit score can be a wise use of your energy. With so many things affecting your number, including opening and closing accounts, applying for loans, late payments, and identity theft, it's possible to see negative impacts regularly.

Improving your score is also possible, though. The tools available to you include being diligent with your payments, taking out loans for necessary purchases only, and having fraud alerts for your accounts. When your credit is affected negatively it can change your life and remove some of the very important options you need for personal success.

A few items that can be affected by having a low credit score are utility deposits, rental approvals, insurance rates, and bank accounts. Losing money on high rates and unnecessary deposits, as well as not obtaining that incredible apartment or bank account can be avoided by keeping a careful eye on your credit score. Here's what you need to know about the costs of low credit scores.

Unnecessary Utility Deposits

When moving into a new home, one of the first things that must be done is to contact the power, gas, and water providers as they apply.

Utility companies often require a deposit when you first request their services. Unless you have been a responsible, previous customer with them or have a positive history of paying your utilities on time with another company, you should expect to pay a deposit.

However, sometimes just having a high credit score encourages these companies to waive this security. Deposits are required to cover the cost of possible future unpaid balances. If your credit score is high enough, it signals to them that you care about your credit and are a trustworthy customer who most likely pays the bills on time.

High Insurance Rates

While drivers and homeowners used to be able to obtain good insurance rates based on their driving record or home, for the past 20 years many insurance companies have based rates on credit scores as well. Some states ban this practice, but if you live in a state that allows it, your credit score could cost you.

So while you may be a safe and courteous driver or take great care of your home, the fact that you have unpaid medical bills or late credit card payments could add to your monthly expenses by raising your insurance rates.

In the past, with a previous insurance policy, I saw a “good credit discount” that reduced my premium. This is just another reason that having the highest credit score can help save you money on the ongoing little things like insurance that can add up throughout the year.

Denied Rental Applications

A high credit score can really come in handy when you are attempting to rent a home or apartment.

Whether you are renting because you cannot afford to buy or because you want to experience the neighborhood before you commit to a location, the option should be yours. You might even, like me, be permanently on Team Rent. Nothing wrong with loving the renter lifestyle.

However, if you have a low credit score, especially if it's due to poor rental history with regard to back rent due or late fees, your chances of getting into your choice of an apartment or home drop considerably. When I moved to Idaho to start over, my good credit allowed me to get exactly what I wanted, where I wanted to live.

Credit scores, whether it's fair or not, are used as a reflection of your life as a number that quantifies how you manage your money and obligations. Unfortunately, businesses use them more than perhaps they should to assess your character.

Rejected Bank Account Options

When you open a bank account, more often than not the institution will pull a credit report. It will either be what's called a soft pull, or a hard pull. A soft pull will not affect your credit score because of an inquiry, but a hard pull will. Either way, if you have a low score, your access to certain benefits may be denied. These are important options like:

  • Bank credit cards.
  • Lines of credit.
  • Overdraft protection.

You will have to show a positive credit history with one of their secured credit card programs. This is where you deposit a few hundred dollars into a credit card. Then you use that card like a regular credit card, but the bank will charge you interest on your purchases if you don't pay the balance in full each time. This has the potential to cost you more money out of your pocket for using your own funds.

Bottom Line

Working to improve your credit score can potentially save you money. It's about your personal history and new relationships with lenders who find it easier to trust you if you have a higher score.

Having to put up deposits for each utility you turn on takes money out of your pocket and away from earning interest somewhere else. Paying higher rates for car and homeowners insurance lowers your yearly income and potential for putting that money aside for savings or other necessities.

Losing the chance to rent the apartment of your choice or obtain the perks your bank has to offer can all be avoided by carefully cultivating a solid credit rating that stands out and shows the world you can be trusted.

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