Thursday, February 6

The hidden costs of bad credit

The hidden costs of bad credit
| By Nicholas Pell, MainStreet

Your credit rating impacts many aspects of your everyday life. Here's how.

Sure, you know that having bad credit can mean paying more for a car loan or a mortgage. You know that it means you can pay more to use your credit cards. But did you know that people with bad credit also pay more for their car insurance and sometimes even for rent? There are more costs of having bad credit than you might know.

Increasingly, employers are using credit reports to help make decisions of hiring and firing. Randy Padawer, a consumer advocate with Lexington law states that more than half of all major companies are using background checks as part of a pre-employment screening. "I think it's unfair," he says, but quickly adds "it's something that consumers must remember when they're doing something as mundane as paying a credit card bill."

Gail Cunningham, vice president of membership and public relations for the National Foundation for Credit Counseling points out the reason why credit reports are increasingly used in hiring decisions. "Potential employers might view your credit report as an overall reflection of your responsibility."

What's the cost? Tim Lucas, vice president of mortgage at, breaks it down. "Say that you have to take a job that pays $10,000 a year less because you have bad credit," he says. "That's $100,000 over ten years." While the math is obvious, what might not be is that, in the case of employment, you might be losing more than you would because of high interest rates on a mortgage.

"Car insurance is a big one," says Lucas, adding that drivers sometimes pay double what they would pay if they had better credit scores. Why are car insurance companies pulling your credit report to see what you should pay? "Car insurance companies assume that if you're not responsible with your finances that you might not be a responsible driver," Lucas says.

It's not just car insurance, either. "All kinds of insurance companies are pulling credit reports," explains Padawer, adding that "There's a correlation between the number of claims filed and the total cost of these claims and a person's credit report."

Perhaps the worst hidden cost of bad credit is your apartment. Padawer points out that "rentals are just about the only thing that isn't on your credit report." This means that you might be the most responsible person in the world when it comes to paying your rent on time, but your landlord will never know it: your rental history appears nowhere on your credit report.

On the other hand, Padawer is quick to point out that "there are almost no landlords who won't want to look at your credit report." To feel comfortable with renting to you, a landlord might charge you a double deposit -- no small fee, especially in a larger, more expensive city like Los Angeles or New York.

Lucas is somewhat less sympathetic. "If someone doesn't pay their credit card bills and is always late with their car payment, there's a good chance that they're going to be late with their rent," Lucas said.

If you decide that you want to own a home, you can almost always expect to pay a higher mortgage bill every month; your interest rates are going to be higher.

While you might know that you're paying higher interest rates because you have bad credit, you might not know the actual cost.

Cunningham advises clients to sit down with all of their bills and look at what the interest rates are on each of them. Then, look at what you're paying in real dollars every month. "This can add up to hundreds of dollars a month," she says.

Your monthly cash flow can be impacted another way: the cost of getting your utilities turned on. People with bad credit have to pay larger deposits to get water, electricity and heat turned on. Cunningham points out that you might even pay more for your cell phone every month because you have to get a prepaid instead of a regular monthly account.

Padawer and she agree that there's a far more insidious cost to having bad credit: the psychic toll. "Debt is a monster that lives with you 24/7," says Cunningham. "It makes it harder to be a good parent, spouse or employee." Padawer mentions some more concrete matters. "Debt and bad credit often lead to depression, bad self-esteem and even divorce."

The message is clear: if you have bad credit, start working to make it better. If you have good credit, maintain it. It's far easier to lose good credit than to gain it back.

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