Some people are simply defiant about the use of credit. They feel having credit is a problem they don’t want. Although having credit can cause problems when misused, there are advantages to having good credit and conversely, there are ways bad credit hurts your budget. Here are five examples and some ways to fix them.
Jobs (business startups)
It is not yet widely known that employers often check the credit of prospective employees before hiring. By having bad credit, your budget could be negatively impacted by virtue of not getting the jobs you deserve, limiting your earning power. Employers do this in order to determine the reliability and character profile of potential employees and therefore, bad credit can signal to employers that you are not a good candidate.
Bad credit can also limit your ability to leave an undesirable job because you don’t have the resources to endure the costs of starting your own business or transitioning to a different compensation schedule, especially if the compensation is incentive based or commission. Those types of earnings take time to earn and get paid out and if your budget is too tight, with little credit to fatten the margins, you can become locked in a position.
Most of us have some form of debt. Most of our debt exists in the forms of mortgages, car loans, student loans and credit card debt. The rates of these loans matter as the higher the interest rates are, the more expensive the payment schedules are. The better your credit is, the lower your interest rates are. The worse your credit is, the higher your interest rates are and the worse the terms are.
All of these factors add up and squeeze budgets. Additionally, if your credit reduces the amount of money you have available, you might get in a vicious cycle of using credit to make ends meet. But, bad credit combined with this tactic often creates an avalanche of credit payments where you are no longer paying off anything, but simply paying the interest on money borrowed.
Paying with Credit Cards
If you have a good credit card (normal terms at good rates) you can use it and pay it off every month without incurring any interest payments or charges. This is like giving yourself a free loan, especially if you have your money leveraged (even if merely in an interest accruing savings account). This can be a great way to budget and control your spending. But, if you have bad credit, you might not qualify for a credit card that has these acceptable terms. This limits your ability to take advantage of this proactive form of financial planning.
When money gets tight, using a credit card or other lines of credit is a good way to make ends meet until financial constraints loosen. However, when we don’t have access to credit, we often endure penalties for not having enough money (this really sucks. It’s a financial penalty for not having enough money). If your bank account gets too low or over-drafted and you don’t have an associated line of credit, your lack of money can become very costly.
If you don’t have great credit, you are often restricted from getting a mortgage. This generally means you must rent. The problem with renting while having bad credit is that property managers require larger deposits and worse terms in order to rent. This is due to the perception that people with bad credit are more likely to not pay their rent or leave the rented place in worse shape or without notice. Therefore, you have to pay for this perception on the front end with deposits. Ultimately, this can squeeze your budget and tap your savings.
Here are some ways that you can repair or improve your credit:
- Monitor your credit. One thing that can hurt your credit is inaccurate reporting. Sometimes a paid bill gets reported as delinquent or settled debt doesn’t get expunged from your report. Make sure your credit report is accurate. This is also a good way to make sure your credit isn’t tainted by identity fraud. If this happens take immediate action to remove these faulty credit dings.
- Get small amounts of credit and use it responsibly. For example, get a limited credit card with a small limit. Use the credit card to buy gas and groceries and then pay off the card completely every month. This helps repair your credit by showing creditors that you can handle credit and the responsibility associated with it.
- Don’t borrow more than fifty percent of your available credit (best if you stay under thirty percent). When you borrow more than fifty percent of a credit line it tells creditors you need money and that is a red flag. Credit is a strange thing in that you can get it if you don’t need it. The more you can prove you don’t need it, the more you can have.
- Keep old lines of credit open, even if you have a zero balance. Old credit lines have more status. They indicate that over time you have been able to keep a credit line available and that improves your profile.
Bad credit can be a real burden in today’s world. We all experience various forms of financial stress. Having credit helps us navigate those stresses. If you have blemished your credit, you can take the above steps to improve your credit and help yourself through difficult financial times.