The Long-Term Effects of Bad Credit

Having bad credit puts you at a disadvantage in many areas related to borrowing and spending money. Your bad credit might be the result of a bankruptcy, foreclosure, expensive medical bills, a divorce or credit card overspending. Regardless of the cause, your bad credit will follow you for nearly a decade, or longer if you don't change your ways.

Difficulty Borrowing Money

Traditional lenders, such as banks, credit unions, car dealerships and credit card companies, always check your credit score prior to lending any money or issuing credit. Your bad credit might cause the lender to reject your loan applications. Because of this, you might not be able to buy a house or car. Instead you'll find yourself renting a house and driving an old vehicle with high maintenance costs.

High Interest Rates

When you do manage to borrow money, you will likely end up paying high interest rates. Each additional percent in interest costs $10 more per year per $1,000 borrowed. On a mortgage, this can make a huge difference in the cost of the loan, both in monthly payments and total lifetime interest. When the monthly payments are higher because of bad credit, this can lead into a downward spiral, because you cannot afford the payments and continue adding negative information to your credit report.

Other Effects

Bad credit affects you in areas beyond borrowing money or obtaining lines of credit. Many employers pull your credit report when making decisions on hiring, firing and promotions, especially if the position involves working with money. Insurance companies often charge higher premiums for people with bad credit, because they have found that credit is correlated to the cost of claims. Landlords use credit checks to determine whether to rent to a particular tenant.

The Bright Side

Most negative information on your credit report will stop affecting your credit score after no more than seven years. Some types of bankruptcy stay on your credit report for 10 years. This means that as long as you can get yourself back on track by putting positive information on your credit report, your bad credit score can turn into a good one in seven years, or at the most, 10 years. However, you need to get rid of your bad habits, such as carrying high credit card debt and purchasing things you can't afford, and start managing credit responsibly.