The cost of poor credit: Part one

Financial decisions impact many aspects of our life.

Consumer credit is an important, but confusing topic. Before we can discuss the impact of poor credit, let us first define a few terms:

Credit: According to the dictionary, credit is “money that a bank or business will allow a person to use and then pay back in the future”.

Credit Report: Per the Federal Trade Commission, “Your credit report contains information about where you live, how you pay your bills, and whether you’ve been sued or arrested, or have filed for bankruptcy. Credit reporting companies sell the information in your report to creditors, insurers, employers and other businesses that use it to evaluate your applications for credit, insurance, employment or renting a home.”

Credit Score: According to the Federal Trade Commission, a credit score is model that creditors use “to determine if you’d be a good risk for credit cards, auto loans and mortgages”.

When consumers make financial decisions that lead to negative or derogatory statements on their credit report such as late payments, numerous applications for credit, collections, bankruptcies, etc., this can bring down their credit score. This can result in poor credit. Potential consequences of poor credit include:

  1. The inability to rent an apartment. This can be very challenging, especially since the lack of affordable housing is quickly becoming a national issue.
  2. The inability to get a job. This can make paying back creditors even more of a challenge.
  3. The cost of insurance premiums. Insurance companies will review your credit to determine your insurance premium.
  4. The cost of additional credit. Plainly said, if a person has good credit, they are much more likely to receive favorable credit terms when choosing to take on additional forms of credit such as an auto loan or mortgage (i.e. lower interest rates). When a person has poor credit, they are viewed as a higher risk of non-repayment or default and this typically results in less favorable credit terms (i.e. high interest rates).

For tips on how to improve poor credit, please review the next article in this series, The Cost of Poor Credit: Part 2.

For additional money management resources, visit Michigan State University Extension. Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy. For more information of classes in your area, please visit either the MSU Extension events page or MI Money Health website. Additionally, you can take the Financial Health Survey at MI Money Health to access if you are financially healthy and discover more ways you can improve your financial health.

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