Bad Credit Hurts - How And Why?

Lets see the “why” first, and then I will mention a few points from a Bankrate.com article about “how”.

Why does bad credit hurt?
Come to think of it, your credit history is really keeping a track of your financial responsibility more than your “credit-worthiness”. People who lend money to you are interested in knowing how “responsible” you have been in the past with instances when people lent you money. For lenders, credit-worthiness is analogous to financial responsibility, and that’s what they are looking for in your credit history. For these people your credit history answers this question: If I lend this person some money, what is the probability that he/she will return it? Better credit history means better probability of the lenders getting their money back. No rocket science in this.

People who don’t directly lend you money may also be interested in knowing how financially responsible you have been in the past. These include: your employer, your apartment landlords, your utilities company…and almost anyone else who “lends” you something (products or services) of significant value. These people are purely interested in your financial responsibility rather than the literal “credit-worthiness”. Why? because lack of financial responsibility is always associated with costs. One may argue that making late payments has nothing to do with your job. But, if employers see too many late payments on your credit report, whether you like it or not, “lack of responsibility” is the first thing they will conclude from your credit report. A couple of late payments to credit cards (or other agencies) could be explained as freak mistakes, but more late payments are a sure sign of one or more of these characteristics: you are not organized, you are careless, you spent more than you could afford, after making one late payment you did not take efforts to avoid the second one..meaning either you are a slow learner or you do not have the ability to recognize the problem. All these characteristics can be potential costs for your employer at some point in the future. Your credit history answers the following questions for the respective people:

Employers: Is this person going to mess things up at some point in time and potentially cost us (money/reputation)?

Landlords: Is this person going to pay the rent on time?

To sum up, whether they are lending you money, something else, or employing you, they are all asking the same thing:

Are you financially responsible?

Other than your credit history, what else can provide a well documented answer to that question? Bad credit history means the answer to the question is NO and everyone knows what will follow from then on. Credit scores (like myFICO, Vantage) are formulated in a way to reflect your credit history; there might be loopholes in the formulae used for calculating credit scores, but as long as we don’t have a better answer…these scores will be a measure of our financial responsibility and we need to suck it up.

How many ways can bad credit hurt you?

I stumbled across an article Bankrate.com titled “Bad credit hurts in many ways“. Listed below are some areas where bad credit rating can hurt you. To keep it brief I will just stick to the list, to read more detailed explanations click here.

1. Car loan
2. Car Insurance
3. Job
4. Housing
5. Utilities
6. Cell Phones
7. Elective Medical Procedures
8. School Loans
9. Marriage (what !?)

Wow..that “marriage” on number 9 made me think “I didn’t know people checked credit scores to marry” :). Obviously, it’s not about that.

Btw, Bankrate missed a big one here: Mortgage !! They mention “housing” but only in context of renting apartments not buying homes. Bad credit can really cost you a lot of money in the long run due to high mortgage rates.