Bad credit is not forever, we’ve oft been told. There’s an opportunity to improve for those whose records were marred by bankruptcies or foreclosures or build for those who just started out. But being in the “bad credit zone” for now has its drawbacks and having little knowledge of such is costly, according to NerdWallet’s April 2017 survey.
NerdWallet’s commissioned survey of 2,000 adults revealed the extent of consumers’ knowledge on the impact of poor credit and misconceptions about how credit works in general.
Limited Access to Financing, Insurance, Utilities
It’s common knowledge that bad credit will mean higher rates on mortgages, car loans, student loans, and other financing products. Apparently, this effect goes beyond debts as the following services are negatively affected by a low credit score:
- Car insurance
- Phone services
- Utility deposits
Based on the survey, a good number of the consumer respondents were unaware of these implications in their day-to-day living. “These expenses are often cheaper or nonexistent for those with excellent credit, even though they don’t involve borrowing money.” NerdWallet pointed out.
Contrary to what a fifth of the survey respondents believed, someone with 600 as credit score will have limited access to credit cards in the market per NerdWallet. It draws comparison to another borrower with a credit score in tiptop shape who will likely have eight times more options when it comes to credit cards offering the best features available.
Some Misconceptions About Credit
About a quarter of the respondents thought that there is only one credit score, the survey revealed. As FICO noted on its website, an individual can have multiple FICO scores. This reflects multiple updates to FICO scoring models and every loan product uses specific versions of the FICO scores, e.g. auto loans, credit cards, mortgages.
Per the survey, more than a third of the consumers surveyed thought that carrying a small balance on their credit cards every month will improve their credit score. Leaving a balance every month will not improve your score but will let you incur interest charges. Paying off your balance in full every month is recommended.
From Bad Credit to Good Credit
As announced in February, some adverse events may be removed from credit reports. Their removal will purportedly mean improved credit scores and improved access to financing opportunities perhaps.
Starting July, the three major credit reporting bureaus will exclude civil judgments and tax liens from records of consumers if they lack required personal identifying information and have not been updated.
FICO noted that this expungement could result in an increase in credit scores by less than 20 points. It will take into account the information in those negative items being removed and the other remaining items on the credit report.