If you're feeling too constrained by your current home equity loan repayment plan, it's time to reconsider your opportunities.Let's look at the four ways your current home equity loan is restricting you:1) You have limitations on payments. You simply have to pay the amount owed depending on your current debt and the interest rate you are maintaining.2) You can have significant fluctuations in cash...
Ideally, all the decisions we make in life involve considering the pros and cons of possible outcomes. For example, the decision to eat a piece of chicken after its expiration date should be based not only on the possibility of a tasty dinner, but also the possibility of a less than pleasant gastrointestinal reaction.
In other words, most things in life have advantages and disadvantages, and our actions should be based, but not always, on whether the advantages outweigh the disadvantages. While many bad decisions can occur as a result of not considering the downsides, just as many bad decisions are the result of not understanding the downsides, rather than not considering them at all.
Most people know that irresponsible financial behaviors can give you a bad credit rating, for example, but many people tend to underestimate the many disadvantages of having bad credit. To help put things in perspective for your next financial decision, here are three of the biggest downsides to bad credit.
1. You have a high probability of being rejected for new credit
At its core, having bad credit is basically like walking around with a sign that says, “I can’t handle debt.” At least, this is how most creditors will interpret your poor credit history and low credit score when you come to ask for a line of credit.
This is because lenders use your credit reports and scores as a means of determining your credit risk or how likely you are to pay back what you borrow. Therefore, if you have a history of late payments or defaults on debt, lenders will not want to give you more money and will reject your application for new credit.
Think of it this way: If you lend your neighbor his lawnmower in June but never return it, how likely is it that he will loan you his snowplow in December?
Since most large banks have a fairly low tolerance for risk, consumers with bad credit have limited options for finding a credit card or loan. That is, you’ll be looking at lists of high-risk lenders who specialize in high-risk, bad-credit applicants – lenders who aren’t exactly known for their affordability or top-notch rewards. Which brings us to the next big downside to bad credit: the expense.
2. Creditors, Homeowners, and Utilities Will Charge You More
It took a few tries, but you finally found a subprime lender who will work with you. Much difficult, right? Wrong. Lest you think that qualifying for new credit is the only big downside to having bad credit, just take a look at how much that credit will cost you.
As we mentioned, your credit score is what lenders use to determine your credit risk. High-risk applicants are the most likely to default on their debt (not pay it off), so lenders willing to work with consumers with bad credit have to find some way to balance the risk. They do this by increasing interest rates and adding additional fees.
As an example, consider a loan of $ 10,000 because the loan was paid off in three years. Applicant A, who has an excellent credit score of 750, will likely be offered an APR of around 3.5%, which means Applicant A will pay around $ 550 in interest over the three years.
At the same time, Applicant B, who has a low credit score of 580, had to turn to a subprime lender to obtain a car loan of the same size. The subprime lender charged Applicant B a 10% APR, which means that Applicant B will pay more than $ 1,600 in interest over three years.
What’s worse, it’s not just lenders and credit card issuers who will charge you the most for bad credit. You are likely to face a credit check when applying for a new apartment or when installing utilities in a new location, and having bad credit can result in being charged a larger security deposit than you would otherwise need. provide.
3. You may miss out on valuable financial opportunities.
An important part of finance and accounting, opportunity cost is basically the consideration of what you are missing out on when you make the decision to do something else. For example, if you choose to spend your last $ 5 on a fancy coffee, your opportunity cost might be that $ 5 burger that you won’t be able to eat later.
When it comes to your credit, bad credit is fraught with opportunity costs. Take credit cards, for example. With bad credit, you are stuck with using subprime or secured credit cards that probably cost a lot without offering much. Conversely, if you had good credit, you could potentially earn hundreds of dollars in credit card rewards and benefits each year simply by using the correct credit card.
And it goes beyond credit cards. Drivers with good credit can get dealer incentives when buying a new car, and can even get discounts on insurance for having a healthy credit profile.
Don’t forget the extra money you will probably have to provide when renting a new apartment. Let’s say you have to make a $ 1,000 security deposit when you move out due to bad credit. That money could easily be paying dividends in your retirement account if it wasn’t wasted in the owner’s bank account.
Don’t let bad credit stop you
Although it’s our own choices that often lead to bad credit, few of us actively choose to build up our credit scores. You can end up with bad credit as a result of a series of seemingly minor decisions that are made without considering the consequences. However, it is hoped that knowing these three main disadvantages of bad credit will help you gain perspective when making your next financial decision, big or small.
For consumers who already have credit problems, these disadvantages are likely to be day-to-day considerations. But they don’t have to be lifelong obstacles. You can rebuild bad credit over time by practicing responsible credit habits. You can also use credit repair to eliminate any mistakes or unsubstantiated accounts that lower your score.
The most important rule of thumb for building credit is always, always, always pay your bills on time. Your payment history is worth up to 35% of your credit score, and late payments can cause you to lose dozens of points with a single mistake. You’ll also want to make sure you keep credit card balances low and borrow only what you can afford as agreed.
With time and diligence, even the worst credit can be rebuilt, freeing you from the many disadvantages of having bad credit. Even better, having great credit has many advantages that will make the hard work worth it.