Late bill payments can hurt your credit score, and a low credit score, in turn, can lead to being charged higher interest rates for things you buy via credit, which can increase your monthly bills.
It’s a vicious cycle that can best be avoided by paying bills on time, since your history of payments is the largest factor (35%) in determining your credit score.
Here are six bills – that you probably have to deal with each month – that can be affected by poor credit.
A background check that looks at your credit report is common for lease applications, and the findings could lead to a higher rent payment. Keep in mind that the landlord needs your permission to run a background check, but not allowing it may stop your lease application from moving forward.
If a landlord finds you have a low credit score and considers you a risk when it comes to paying rent, the landlord can take what the Federal Trade Commission calls an “adverse action” against you.¹ These include the following:
The landlord must give you written notice if they take an adverse action, and give you a chance to dispute the information. They should also provide the credit report they used, as long as you request it within 60 days.
A lower credit score can cause mortgage lenders to consider you a riskier borrower. To cover that extra risk, they’ll likely charge you a higher interest rate.
A credit score of 650 might get you an interest rate of 4-5% on a 30-year, fixed home loan. Many mortgage lenders look for a credit score of 720 or higher, which can get you a rate below 4%.
For example, a loan savings calculator at myFICO.com shows how FICO credit scores impact the interest paid on a loan.² A 30-year, fixed loan where the interest rate doesn’t change, with a $300,000 principal balance, would likely have the following interest rates and payments based on particular credit scores:
That’s $144 more per month and $51,872 more in interest over the life of the loan for someone who has a 650 credit score versus someone with a better score of 720.
Interest rates and monthly payments for new auto loans also go up if you have low credit scores.
Those huge banners at auto dealers that promise zero-percent financing? They usually require excellent credit.
The good news is that a car loan will likely be for three to five years instead of 15 to 30 years like a home loan would, and a car loan is for much less money than a home loan. Still, it’s worth improving your credit for the best auto loan rate, and shopping around for a loan is always a good idea.
Paying your credit card bills late – or any other bills – may cause your credit score to drop, and that can lead to higher interest rates when you apply for other credit cards, along with higher interest rates on the cards that are paid late.
In addition to late fees, people who pay their credit card bills late will accrue interest on their credit card balance each month. Carrying a balance from month to month may cost them more in interest if they have poor credit.
A credit score doesn’t generally affect federal student loan payments. Private loans to pay for college, however, are from lenders that can use a credit score to determine whether a person qualifies for a loan and to determine the interest rate on that loan.
A college student or graduate with poor credit would have a higher interest rate and a bigger monthly payment on a private student loan than someone with good credit.
Drivers with poor credit can pay two to four times as much for auto insurance as drivers with excellent credit – but only in states that allow it.
Only a few states do not allow credit information to be used to determine auto insurance: Massachusetts, California and Hawaii. In the other states that do allow it, it’s a common practice.
Credit history is likely to have more of an impact on an insurance premium than any other factor, including a driving record, according to United Policyholders.³ With a poor credit history, a driver with a clean driving record can pay more for insurance than a driver with a traffic violation or accident.
Just as with a housing application, insurance companies must get an applicant’s permission to obtain their credit history. That credit history would, in turn, help the company provide an accurate quote.
Credit-based insurance scores are used to determine rates for homeowners insurance. The scores are industry-specific, and credit report information does play into them; however, insurance scores are not the same as credit scores.
As with a rental application, insurers must notify you if a credit report resulted in adverse action – denial of coverage or requiring a higher premium than someone with an average insurance credit score.
How to Improve Your Credit
Regularly monitoring your credit and fixing errors is important, but so is dealing with legitimate negative items that are affecting your score, such as not missing any payments. Paying down high credit card balances and limiting new credit inquiries will improve a credit score, but one of the best ways to improve it is to pay your bills on time.
Otherwise, those late bills could lead to higher interest rates and higher bills down the road.
Did you know you can work with a Money Coach who is a Credit Specialist? Your Money Coach can show you how best to access your credit reports, help you review them, and give you some next steps for correcting any errors.
With support and education, your Money Coach can help you make smart everyday decisions that improve your credit and, in turn, improve your overall finances. Call 888-724-2326 today to get started!
¹“Using Consumer Reports: What Landlords Need to Know.” Federal Trade Commission, October 2016, https://www.ftc.gov/tips-advice/business-center/guidance/using-consumer-reports-what-landlords-need-know. Accessed 6 June 2017.
²“Loan Savings Calculator.” myFICO, n.d., http://www.myfico.com/credit-education/calculators/loan-savings-calculator/. Accessed 6 June 2017.
³“Credit Scoring in Insurance: An Unfair Practice.” United Policyholders, n.d., http://uphelp.org/pubs/credit-scoring-insurance-unfair-practice. Accessed 6 June 2017.
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