Bad credit can prevent you from qualifying for a debt consolidation loan at favorable terms. Bad credit will cost you thousands of dollars in interest payments to credit cards, car and home payments.
Bad credit is an epidemic in America, with more than half of all consumers strapped with such low credit scores that they can’t borrow at market rates.
Low savings rates and stagnant incomes contribute to the problem. Poor credit hits families hard. They live close to the financial brink, just an expensive car repair or medical emergency away from insolvency. And they are often blocked from borrowing to buy homes, pay for cars and continuing education that might lead to better-paying jobs.
Repairing your credit can take time and requires thoughtful money management. Ruining a credit score, however, might not take long at all.
Consider what happened to Jimmy, who lost his job as a welder during the Great Recession. Though he was able to collect state unemployment insurance, it wasn’t enough to pay the mortgage or the expense of raising two small children.
Jimmy ran through his emergency savings in four months. When he stopped paying his mortgage, the bank foreclosed. His two credit cards also fell into default. By the time he eventually returned to work a year later, his family was living with a relative and his credit was flat-lined.
Jimmy’s credit repair job took several years. Even though his income bounced back, albeit at a slightly lower level than before the job loss, he was able to begin making payments on his credit card through a debt management program.
But the recovery had consequences. At first, he could only get a secured credit card. When his credit improved enough to qualify for a conventional credit card, he was shocked to learn that the interest rate on unpaid balances would be more than 25%. He also learned that he would have to wait several years to qualify for another mortgage loan.
For folks like Jimmy, a major financial setback is a double whammy. First there is the immediate loss of home and purchasing power of credit cards, then there’s the problem of re-establishing credit. Lending guidelines were tightened after the economic meltdown, making it even harder for those with tarnished credit to borrow money.
The first thing anyone whose credit score took a nosedive learns is that borrowing costs more and that’s if you can even qualify for a loan or a credit line. Home loans might be impossible to get, or might require a huge down payment or co-signer. Car loans have very high interest rates. Credit card options are limited. Even finding a landlord willing to rent you an apartment with bad credit can be difficult if your credit score is under 550.
It’s the subprime dilemma, and according to a 2015 report from the Corporation for Enterprise development, 55.6 percent of American families face it to some degree due to low credit scores.
What can you do to climb out of a poor-credit morass? Here are a few options:
Brooks, J., et. al. (2015, January) Excluded from the Financial Mainstream. Retrieved from: http://community-wealth.org/content/excluded-financial-mainstream-how-economic-recovery-bypassing-millions-americans
NA, ND. Credit Scores. Retrieved from: https://www.consumer.ftc.gov/articles/0152-credit-scores
Ratcliff, Caroline, et. al. (2014, July 30) Delinquent Debt in America. Retrieved from: http://www.urban.org/research/publication/delinquent-debt-america
NA (2014, February 18) American Debt Explosion: The Good, the Bad, and the Ugly. Fortune. Retrieved from: http://fortune.com/2014/02/18/american-debt-explosion-the-good-the-bad-and-the-ugly/
Learn the credit score cut-off for a debt consolidation loan and about other debt relief alternatives for people with bad credit.
Practical tips that will help you rent an affordable apartment when you have poor credit: including using a co-signer, renting a family-owned apartment and paying a larger deposit.