How Expensive Is Bad Credit? Many do not know (part 1)

It’s 2017: Do you know what your credit score is?

Good credit is important for many reasons beyond qualifying for the best loan rates. And the first step in its construction is to know its starting point. But a NerdWallet poll finds that while more than a quarter of Americans (26 percent) check their credit scores monthly or more often, almost 1 in 8 (12 percent) have never checked their ratings.

In an online survey of more than 2,000 US adults, commissioned by NerdWallet and conducted by Harris Poll in April 2017, we asked Americans what they knew about the impact of bad credit as well as factors that affect and do not affect credit ratings . Here is what we learned:

  • About half of Americans (49 percent) do not know that having bad credit can limit a person’s choices for cell phone service. There are ways to get a cell phone without a credit check, but consumers with poor credit have fewer options.
  • Almost a quarter of Americans (23 percent) think a person has only one credit score. Most consumers have many ratings, and may vary based on the information used to calculate them. The scoring provider and scoring model your lender will look at will depend on the reason you are looking for credit: there are specific auto and mortgage scores, for example.
  • More than 2 in 5 Americans (41 percent) think that carrying a small balance on a month-to-month credit card can help improve a person’s credit scores. This is a common mistake. To avoid interest charges, pay off credit cards each month.

What you do not know about credit can cost you

About 40 million Americans have a FICO credit score below 600, and many may not understand the impact they may have on their daily lives, even if they are not applying for loans or charged with high interest debt.

The daily effects of bad credit

Having bad credit is expensive, and not just because of the high interest lenders charge. More than 2 in 5 Americans (43 percent) do not know that having bad credit can adversely affect the price of car insurance, and more than half (52 percent) do not know that it can negatively affect the cost of public services. These expenses are often cheaper or nonexistent for those with excellent credit, even though they do not involve cash loans.

Bad credit can even limit housing opportunities. Many homeowners check credit reports of applicants, but nearly a quarter of Americans (23 percent) do not know that having bad credit can negatively affect a person’s ability to rent an apartment. And almost half (49 percent) do not know that bad credit can limit the ability to get a cell phone. Consumers with bad credit could be restricted to prepaid phones and lose the best plans of carriers. It could even be challenging to get certain jobs with bad credit.

Bad Credit Means Fewer Credit Card Options

More than 1 in 5 Americans (21 percent) believe that a person with a credit score above 600 qualifies for any credit card he or she wants. Another 40 percent are not sure if a score above 600 qualifies a person for any credit card. In fact, 600 is a below average score and will not give consumers access to most of the cards in the market.

Consumers with excellent credit have nearly eight times more credit card options than consumers with bad credit.  Those with bad credit will miss the cards with the best rewards and the lowest interest rates, as well as the best travel protection and travel benefits.

Wrong ideas surround credit score

Why So Many Americans Have Bad Credit? Here’s one possibility: cost-of-living increases have outpaced revenue growth over the past 13 years, according to NerdWallet’s annual household debt survey. Many consumers could maximize credit cards to bridge the gap and then stay behind in payments or defaults.

Another theory is that Americans simply do not understand how credit works. Our survey found many misconceptions about credit scores, including the number of outcomes people have and the factors that influence them.

What is a credit score?

A credit score is a three-digit number, usually on a scale of 300 to 850, which estimates the probability that someone is to pay the money borrowed. If you make regular payments to a lender – on a credit card or a car loan, for example – you probably have credit scores.

More than 1 in 10 Americans (11 percent) think that everyone starts with a perfect credit score. In fact, you should build your scores from scratch, but do not start from scratch. Do you want to measure your progress? Your qualifications will not necessarily be included in your credit report, although nearly two-thirds of Americans (64 percent) think they are. Free credit reports available once a year from AnnualCreditReport.com do not include scores. However, you can get free ratings from various sources, including NerdWallet.

The components of a credit score

Five basic factors come into the majority of credit ratings: payment history, credit utilization, credit history duration, types of credit in use, and new credit.

Payment history: One of the best things you can do for your credit score is to make payments on time, 100 percent of the time. It is better to pay the total balance of your credit card, but at least pay the minimum on the due date. Creditors do not report payments that are only a few days late to the credit bureaus, but they pay 30 days or later and you can tank your bills.

Credit Utilization: Refers to the proportion of your available credit you are using at any given time. Between 1 percent and 30 percent is ideal, but people do not understand these numbers.

Possibly because credit helps their scores more than not using them at all, more than 2 out of 5 Americans (41 percent) think that carrying a small month-to-month balance can help improve a person’s scores, while That a fifth (20 percent) thinks it can hurt him. In fact, if someone carries a small balance it probably does not affect their grades at all.

“The idea that you have to carry debt to have good credit is a dangerous and expensive myth that needs to die,” says Liz Weston, a columnist for NerdWallet, author of “Your Credit Score.” Carrying a balance will mean you pay interest, but it will probably have no impact on your credit – just your wallet.

Credit history duration: this includes the total time you have had credit – from your first credit card or loan – and the average age of all your credit accounts. It is a good idea to keep your older account open and avoid closing other older, unused accounts unless you have a good reason, such as they charge annual fees or have to drop a joint account. If you decide to close other accounts, consider the length of credit history to limit the negative effect on your scores.

Mixing Credit Accounts: Having a mix of account types does not have a big impact on credit scores, but it may be useful to have revolving accounts, such as credit cards and lines of credit, and installment loans such as mortgages, loans for automobiles or student loans. You can build and maintain good credit with only one type of account.

New credit: The final factor refers to the number of new accounts you have opened or applied to open. When you apply for a credit card or loan, a “difficult” query appears on your credit file. Check your own results results in a “soft” investigation that will not hurt your credit. However, difficult questions are not good for your qualifications, so you will want to limit the number of applications you submit.

The exception is when you are “making rate” purchases for a mortgage or auto loan. In these cases, it is wise to apply on several different lenders to get the best rate. Credit bureaus count multiple queries as a single query, as long as they are done within a certain time frame, usually a few weeks.