Ideally, all the decisions we make in life involve considering both the pros and cons of possible outcomes. Check out the article written by Ali Sami Farooq to know more.
Most things in life have both positive and negative sides, and our actions should be – though not always – based on the fact that the positives out we overcome the disadvantages. While many bad decisions can occur as a result of a failure to take into account the disadvantages, as well as many wrong choices are the result of not understanding the disadvantages, rather than not considering them at all.
Most people know that irresponsible financial behaviors can give you a negative credit score, for example, but many people tend to underestimate the many downsides of having bad credit. To help you put things into perspective for your next financial decision, here are three of the biggest drawbacks of having bad credit.
Basically, having bad credit is basically like walking around wearing a sign that says, “I can’t handle debt.” At least, that’s how most lenders will interpret your poor credit history and low credit score when asking for a credit line.
This is because lenders use credit reports and scores as a means of determining credit risk or the likelihood that you will repay what you borrow. So, if you have a history of missing or defaulting payments on debts, lenders won’t want to give you more money and will refuse your claim for new credit.
2. Creditors, owners and service companies will charge you more
It took a few attempts, but in the end you found a subprime lender that will work with you. Big, hard part over, right? Wrong. Not to think that qualifying for a new credit is the only big drawback of having bad credit, take a look at how much that credit will cost you.
As mentioned, your credit score is what lenders use to determine your credit risk. High-risk claimants are the most likely to declare their debt insolvency (not pay it), so lenders willing to work with consumers with bad debts need to find a way to balance the risk. They do this by raising interest rates and adding extra fees.
An important part of finance and accounting, opportunity cost is basically the consideration of what you’re missing when you make the decision to do something else. For example, if you choose to spend your last $5 on sophisticated coffee, the opportunity cost could be that $5 burger that you can’t eat later.
When it comes to your credit, having bad credit is full of opportunity costs. Take credit cards, for example. With bad credit, you’re stuck using subprime or guaranteed credit cards that probably cost a lot without offering much. On the contrary, if you had a good credit, you could potentially earn hundreds of dollars in rewards and credit card benefits each year simply by using the right credit card.
And it goes beyond credit cards. Drivers with good credit can get incentives from the retailer when buying a new car, and you can even earn insurance discounts to have a healthy credit profile.