Side effects of bad credit Explained

Ashly Chole Senior Finance Researcher

Last Updated 18 June 2024

What are the Most Common Side Effects of Bad Credit?

Bad credit refers to a person's credit history, which records their past borrowing and repayment activities. If a person has bad credit, it typically means they have a history of not paying their debts on time or defaulting on loans or credit cards. Bad credit can result in a low credit score, making it difficult for them to get approved for loans, credit cards, or other financial products.

Having bad credit can also lead to higher interest rates and fees on loans and credit cards, making it more expensive to borrow money. It is important to regularly monitor your credit score and report to ensure you have good credit standing.

Bad credit can have numerous side effects affecting your financial, personal, and professional life. Some of the most common side effects of bad credit include:

  • Difficulty obtaining loans or credit: One of the most significant consequences of having bad credit is that it can make it difficult or impossible to obtain loans or lines of credit. Lenders view individuals with bad credit as high-risk borrowers, and they may be less likely to extend credit or may offer credit at higher interest rates to compensate for the perceived risk.
  • Higher interest rates: Even if you are approved for a loan or credit with bad credit, you will likely have to pay higher interest rates. Higher interest rates mean that you will end up paying more for the same amount of credit compared to someone with good credit.
  • Limited access to financial products: In addition to loans and credit, bad credit can also limit your access to other financial products, such as insurance or renting an apartment. Insurance companies and landlords may view individuals with bad credit as high-risk, charging higher premiums or requiring larger security deposits.
  • Negative impact on employment opportunities: Employers may also conduct credit checks on job candidates, especially for positions that involve handling money or sensitive information. Having bad credit can make it more challenging to secure certain jobs or advance in your career.
  • Emotional stress: Finally, bad credit can also cause emotional stress, as individuals may feel ashamed or embarrassed about their financial situation. They may also experience anxiety or depression related to their financial difficulties.

Bad credit can have significant financial and emotional negative consequences. It is important to improve your credit score and avoid falling into the bad credit trap.

How Many People Have Bad Credit?

several factors could contribute to the increase in bad debt, including:

  • Economic downturns: When the economy experiences a recession or economic slowdown, people may lose their jobs, struggle to make ends meet, and default on their debts.
  • Easy access to credit: With the rise of fintech companies and online lenders, it has become easier for people to obtain credit, including credit cards, personal loans, and other types of loans. Easy access to credit can lead to some individuals overextending themselves and accumulating more debt than they can afford to pay back.
  • Stagnant wages: In many countries, wages have not kept up with the rising living costs, including housing, education, and healthcare. Stagnant wages can make it difficult for people to make debt payments, leading to missed payments and defaults.
  • Medical debt: Medical expenses can be very high, and many people do not have adequate health insurance coverage. When people face unexpected medical bills, they may turn to credit cards or other forms of debt to cover their expenses, leading to increased bad debt.

The increased bad debt is a complex issue that various economic and societal factors can influence. Individuals need to manage their debt responsibly and seek help if they struggle to make payments.

Amount Of People With Bad Credit

Country Rough Number of People in Bad Credit
United States 34 million
China 17 million
India 160 million
Brazil 10 million
Japan 3 million
Germany 2 million
United Kingdom 5 million
Australia 3 million
South Africa 12 million
France 2 million
Italy 2 million

How Does Bad Credit Affect Your Ability to Obtain Loans or Credit Cards?

Having bad credit can significantly impact your ability to obtain loans or credit cards. Lenders and credit card companies use your credit score to determine your creditworthiness and assess the risk of lending you money or extending credit. If you have bad credit, you are considered a higher-risk borrower, and lenders may be less likely to approve your application or offer you favourable terms.

Can Bad Credit Impact Your Ability to Rent an Apartment or Obtain a Mortgage?

Bad credit can impact your ability to rent an apartment or obtain a mortgage. Landlords and mortgage lenders may use your credit score to evaluate your financial responsibility and determine your eligibility for a lease or mortgage. If you have bad credit, they may be less likely to approve your application or require a higher security deposit or down payment.

How Does Bad Credit Affect Your Credit Score?

Bad credit can significantly impact your credit score. Your credit score is a numerical representation of your creditworthiness. It is based on your credit history, including your payment history, credit utilization, length of credit history, and types of credit used. If you have a history of late or missed payments, high credit utilization, or other negative factors, your credit score may be lower, making it more difficult to obtain credit or loans in the future.

What are the Long-Term Consequences of Having Bad Credit?

The long-term consequences of having bad credit can be significant. In addition to difficulty obtaining credit and loans, you may face higher interest rates, limited job opportunities, higher insurance rates, and difficulty renting an apartment or obtaining a mortgage. Bad credit can also impact your mental health, relationships with family and friends, and ability to save for retirement.

How Does Bad Credit Impact Your Ability to Start a Business?

Bad credit can make it difficult to start a business. Most startups require some form of funding, whether it's through loans, investors, or credit cards. If you have bad credit, you may not be able to obtain the funding you need or may have to settle for less favourable terms, making it more challenging to launch and grow your business.

Can Bad Credit Impact Your Ability to Obtain a Job?

Yes, bad credit can impact your ability to obtain a job, especially if the job involves financial responsibilities. Employers may check your credit score as part of the hiring process to evaluate your financial responsibility and trustworthiness. If you have bad credit, it may signal to employers that you are not reliable or trustworthy with money, which could impact your chances of getting hired.

How Does Bad Credit Affect Your Insurance Rates?

Bad credit can also impact your insurance rates. Insurance companies may use your credit score to determine your premiums. Studies have shown that people with lower credit scores are more likely to file claims, and insurance companies adjust rates accordingly. If you have bad credit, you may pay more for auto, home, or other types of insurance.

There can be legal consequences of having bad credit, especially if you fail to pay your debts. Some legal consequences of bad credit include wage garnishment, lawsuits, and bankruptcy. Wage garnishment is when a court orders your employer to deduct a portion of your paycheck to pay off your debts. Lawsuits can be filed against you by creditors seeking repayment, and bankruptcy is a legal process that allows you to discharge some or all of your debts.

How Does Bad Credit Impact Your Relationships with Friends and Family?

Bad credit can impact your relationships with friends and family. If you cannot repay debts or loans, it can strain relationships and cause tension. You may also feel ashamed or embarrassed about your financial situation, leading to isolation or depression.

Can Bad Credit Impact Your Ability to Travel Internationally?

Bad credit can impact your ability to travel internationally. Some countries require visitors to have a certain level of creditworthiness; if you have bad credit, you may be denied entry or have difficulty obtaining a visa. Additionally, your passport may be revoked or denied renewal if you have outstanding debts or judgments.

How Does Bad Credit Affect Your Mental Health?

Bad credit can harm your mental health. Financial stress and worry can lead to anxiety, depression, and other mental health issues. It can also impact your relationships, work performance, and overall quality of life.

What are Some Strategies for Improving Bad Credit?

Several strategies for improving bad credit include paying bills on time, reducing debt, disputing errors on your credit report, and working with a credit counsellor or financial advisor. It may take time and effort, but improving your credit can have significant long-term benefits.

How Does Bad Credit Affect Your Ability to Save for Retirement?

Bad credit can impact your ability to save for retirement. High-interest rates, debt payments, and limited access to credit can make it challenging to save money for the future. It's important to address any bad credit issues and develop a plan to pay off debt and improve your credit score to ensure a more secure financial future.

Can Bad Credit Impact Your Ability to Get a Phone Contract?

Bad credit can impact your ability to get a phone contract. Phone companies may check your credit score before offering you a contract or require a deposit if you have bad credit.

How Does Bad Credit Affect Your Ability to Get a Car Loan?

Bad credit can make it difficult to get a car loan. Lenders may be less likely to approve your application or offer less favourable terms, such as a higher interest rate or a larger down payment. Sometimes, you may need to work with a subprime lender or buy a cheaper car.

What Are Some Common Misconceptions about Bad credit?

There are several common misconceptions about bad credit, including that it only affects people who are irresponsible with money or that it is impossible to improve. Bad credit can happen to anyone, even financially responsible, due to unforeseen circumstances such as medical bills, job loss, or divorce. Additionally, while it may take time and effort, improving bad credit with the right strategies and support is possible.

How Does Bad Credit Affect Your Ability to Get a Student Loan?

Bad credit can make it difficult to get a student loan. Federal student loans do not require a credit check, but private student loans may require a credit check and may be more difficult to obtain if you have bad credit. If you have bad credit and need a student loan, you may need to work with a co-signer or consider other options, such as grants or scholarships.

Can Bad Credit Impact Your Ability to Get a Security Clearance?

Yes, bad credit can impact your ability to get a security clearance. The government considers financial responsibility as a factor in determining eligibility for a security clearance, and bad credit may signal a lack of financial responsibility or trustworthiness. If you have bad credit and are seeking a security clearance, it's important to address any issues and develop a plan to improve your credit score.

What are Some Resources Available to Help People with Bad credit

Several resources are available to help people with bad credit, including credit counselling services, financial advisors, and credit repair companies. These resources can provide guidance and support to help you improve your credit score, develop a budget, and manage your finances. Researching and choosing reputable and trustworthy resources is important to ensure the best possible outcome.