3 Ways a Bad Credit Score Can Come Back to Haunt You

By Nathan Hamilton Markets Fool.com

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Credit scores may be the most important number in our financial lives that the majority of Americans don't know about. In fact, 60% of Americans don't know their credit score, according to LendingTree research. People with good credit are better able to land a low mortgage rate or qualify for some of the best credit card sign-up bonuses, so it pays to know where you stand.

With that in mind, Motley Fool credit card expert Nathan Hamilton and Deputy Managing Editor Michael Douglass discuss in the video below three ways a bad credit score can come back to haunt you.

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MICHAEL DOUGLASS:

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Nathan, let's talk about three ways that a bad credit score can come back to haunt you. And, of course, before we get into that, let's talk about what a credit score is and why it's important.

NATHAN HAMILTON:

Sure. There are a number of credit scores out there. You can take more than your two hands to count all of them.

MICHAEL DOUGLASS:

Right.

NATHAN HAMILTON:

But really the important ones are going to be your FICO scores, which everyone's familiar with. FICO is Fair Isaac Corporation. It's a company that runs the official FICO scores, and it's pretty much the industry standard. Banks have come to use it to make lending decisions, auto loans, and so forth.

Really it's a three-digit number that is going to determine what you pay in terms of an interest rate, how much somebody is willing to lend to you as a bank, and it's one of the most important numbers in your financial life.

MICHAEL DOUGLASS:

Absolutely. And, of course, we talked about high interest rates. One of the big things that a poor FICO score can do to you is you can get dinged with a high mortgage rate.

NATHAN HAMILTON:

Absolutely. If you look at the difference between someone with a high FICO score, which is generally above 750, versus someone with the lowest FICO score, if you're borrowing on a mortgage, it can be [a difference of] hundreds of thousands of dollars between what you'd pay for the high FICO score versus the low FICO score, and it all just comes down to the interest rate that the bank determines you're going to pay when you make that borrowing decision.

MICHAEL DOUGLASS:

Yes, because let's face it. A few bucks a month over 30 years can make a pretty big difference, and we are talking about potentially a few hundred dollars a month.

NATHAN HAMILTON:

Yes. I mean, the way mortgages work, as well, is up front you're paying all interest and the ability to pay down that principal faster, which comes through a lower interest rate, has a huge effect on what you pay over that 30-year time frame.

MICHAEL DOUGLASS:

Right.

NATHAN HAMILTON:

So it's really important and definitely should be something that if you're looking at buying a home in the next year, next five years, next few months; you've got to get your credit score in check.

MICHAEL DOUGLASS:

Absolutely. Let's also talk about qualifying for the best credit cards. I mean, let's face it. There are premier cards that have premier awards and usually they're tied to having a good credit score because these folks do not want to lend to someone that they think is anything less than totally trustworthy.

NATHAN HAMILTON:

So a good credit score and better will get you a pretty high-quality credit card nowadays, and that's really mid-700s and up. But yes, if you want to get a new cardholder bonus, where it's sometimes $500-600+ for a credit card, you can only do so with an excellent credit score.

MICHAEL DOUGLASS:

Right.

NATHAN HAMILTON:

If you want to get a card that earns 2-3% cash back or more, you can only do so with a good credit score. If you want to get a low APR card, or a good balance transfer card, you guessed it. You can only do so with a good credit score. And the remainder of people with a lower credit score are somewhat stuck to higher APR cards that charge more interest. There may be fees associated with them. Lower credit limits which actually may be smart for people that are just establishing their credit history.

But it's just [that] your ability to get ahead financially is impacted by if you get extra or higher rewards. If you get a cardholder bonus. That's cash in your pocket that you're able to get, that somebody else isn't.

MICHAEL DOUGLASS:

Sure. And for the third way, it's sort of an amalgamation of different things that can...

NATHAN HAMILTON:

Weird ways.

MICHAEL DOUGLASS:

Yes. Five weird ways!

NATHAN HAMILTON:

Yes.

MICHAEL DOUGLASS:

But it's things like library fines, lapses in your gym membership. What else?

NATHAN HAMILTON:

Your cable bill. Getting a new phone through a mobile carrier. They're going to run a credit check on you to see if you don't have to put down any money for the new phone. Library fines, as you mentioned. Renting an apartment. They're going to check your credit. Pretty much anything that involves a financial decision may check your credit. It really does impact your life, so if you've got that apartment you've had your eye on, when it comes down to credit scores that's one thing that you can fix. That you can address. So there's really no reason to put yourself in that situation.

MICHAEL DOUGLASS:

Absolutely. For more on credit scores, and credit cards, and really just all things credit, check us out at fool.com/credit cards. There's a wealth of good information, there. We've got some free guides on credit scores and also The Motley Fool's picks for the top credit cards of 2017.

NATHAN HAMILTON:

Absolutely.

MICHAEL DOUGLASS:

So check us out there and we'll look forward to seeing you there. Thanks, Nathan.

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