These are the biggest disadvantages of having a bad credit score (2024)

Agood credit scoregives you access to premium credit cards, better loan products and more favorable interest rates.

But if you have a bad credit score— somewhere in the FICO range of300 to 579 or VantageScore range of 300 to 600 — you'll miss out on these deals and often pay much higher in interest on credit cards, loans and mortgages.

A bad credit score can make life difficult in a number of ways, and it can even delay retirement by costing you more money over time. But improving your credit score is about much more than luck, and it's only possible if you understand just how much your credit score impacts your life.

Below, CNBC Select speaks with financial expert John Ulzheimer, formerly of FICO and the credit bureau Equifax, about the most common disadvantages of poor credit. Plus, he offers the first step you should take to break the bad credit cycle.

Since banks likeCiti, Bank of Americaand Discoverhave rigorous standards for determining who qualifies for lending, you might not qualify for traditional loans or credit cards when you have a bad credit score.

"The practical effect of having a poor credit score is that your access to mainstream funding is limited or nonexistent," Ulzheimer tellsCNBC Select.

But before you seek lending from less-than reputable sources like payday loans, pawn shops and title loan companies, Ulzheimer stresses the importance of reading the fine print.

Payday loans, for example, are an easy way to get fast cash if you're in a bind, but they come with disclosuresstating that the APR can be as high as 400% to 700%. These should be avoided if at all possible, explains Ulzheimer.

"If you've got a choice between a $10,000 personal loan from Wells Fargo or a loan from 'Joe's title loan,' reading the disclosures and agreements will make it very obvious that the mainstream lender will give you a better deal — that's just mathematics," he says.

Not only will a good credit score help you bank with more reputable institutions, but it also gives you the best interest rates on loans.

According to Ulzheimer, consumers get the best deals on APR for auto loans with a score of 720 or higher, and for mortgages, 750 or higher.

Let's say you're applying for a mortgage with a FICO score of 620. For a $300,000 house, you might pay about 4.8% in interest with the current rates, whereas a buyer with a score between 760 and 850 would borrow at roughly3.2% APR.

A 1.6% difference sounds small, but in this case your lower credit score would increase your mortgage payment by about $275 per month— costing you $99,000 over a 30-year term.

Most U.S. states allow credit-based insurance scoring,giving auto and homeowners insurance companies permission to factor your money habits into their assessment of your risk.

A dip in your credit score will not automatically increase your premium, nor will your policy be canceled if you drop below 600. But a bad credit score could prevent you from getting the lowest possible rate. If you want to see your credit-based insurance score, you can request a report through LexisNexis.

(Note: Credit-based auto insurance scoring has been banned in Hawaii, while credit-based home insurance scoring has been banned in Maryland. The practice has been banned entirely in Massachusetts and California.)

Good credit habits set you up for better career opportunities. In most states, employers are allowed to pull consumer credit reports to make hiring decisions, and even when deciding who to promote and reassign. (This is particularly true if the job comes with a lot of financial responsibilities.)

Your employer won't see your exact credit score, but with your signed permission they can access your credit report and view information like your open lines of credit, any outstanding balances, auto loans, student loans, past foreclosures, late or missed payments, any bankruptcies and collections balances.

A credit score of 620 is often the minimum you need to qualify for an apartment, according to Experian.

Some landlords and property management companies are stricter than others, but you can breathe easier if your credit score is 700 or above. When you have poor credit, you may have to scramble to find a cosigner or pay a security deposit before you sign a new lease. It's not impossible to rent an apartment with bad credit, but it can certainly be a lot harder.

"Utility companies are allowed to charge deposits when you have a poor credit score," Ulzheimer explains. "And I don't know any utility companies who are going to give you an account without a background check."

In some states, there are protections against terminating your access topublic service utilities like water, electric, gas and heat (view the state-by-state policies on the Low-Income Home Energy Assistance Program's website).

And if you are denied access to energy utilities due to poor credit, you may be able to pay a deposit or submit a letter of guarantee which acts essentially like a guarantor or co-signer agreement if you fall behind on your bills (read the FTC's consumer information on utility services).

And as for non-public utilities, like internet and cable, there are fewer legal protections in place to guarantee access to these services, even though the U.N. now considers access to the internet a human right.

The best rewards credit cardsrequire the highest credit scores. When your score is good or excellent, you can access thebest introductory offers and cash-backincentives available among credit products today.

Some higher tier credit cards also give away special invitations to exclusive concertand event pre-sales, reward you with cash back onstreaming servicesand more.

Whether you're a sports fan, a movie buffs or an adventure seekers, one of CNBC Select's top picks for cash-back cards is the*Capital One Savor Cash Rewards Credit Card. It offers a competitive 4% cash back on dining and entertainment, 3% at grocery stores and 1% on all other purchases. New cardholders can earn a one-time $300 cash bonus once they spend $3,000 on purchases within the first three months from account opening.

Bad credit can also have a long-term impact on your financial life. If you have high-interest credit card debt, you're not able to put any money away for the future — at least not enough to balance out your APR fees.

As long as your interest rates are high, you're putting less money into equity and assets and more money into servicing debt. And debt has no return on investment; the money you pay in interest is cash that you will never see again.

In some cases, qualifying consumers should consider abalance transfer credit card with limited-time 0% APR,. A balance transfer card can help knock out some interest payments if you have existing debt to pay off. As you lower your debt-to-credit ratio, your credit score should improve, and then it might be worth refinancing your mortgage or auto loans to see if you can earn a better APR, shave some of that interest off and put it aside for retirement savings.

"If you have really poor credit, you probably know it," says Ulzheimer. You might feel embarrassed, guilty or worried, but you're likely "not going to be surprised if you pulled your credit and found delinquent and defaulted accounts."

The main reason why people with bad credit scores don't improve them is not because they aren't aware; it's just because they're caught in a cycle.

Think of it this way, says Ulzheimer: "If you screw up a pizza, you can throw it out and pop another in the oven. But credit is a self-policing and very punishing environment."

In other words— it's not so easy to start again fresh. Delinquencies (accounts that have fallen behind on payments for more than 30 days) stay on your credit report for at least seven years.

But Ulzheimer reminds consumers that seven years is not a life sentence — unless you keep "restarting the clock" by defaulting on more and more payments.

The first step to take to break free from the debt cycle is to "hit the reset button," says Ulzheimer.

This could be speaking with a nonprofit credit counselor, working with a debt attorney, filing for bankruptcy or even staying out of the credit game for the next several years if necessary.

"You may need to sit on the sidelines for a little while," says Ulzheimer, which could mean putting your credit cards away.

And if you do qualify for one of CNBC Select's best credit cards for bad credit, "expect punitive terms," he explains. This could be an annual fee (but no rewards to offset it), higher-than-average APR or even a secured credit card like theDiscover it® Secured Credit Card,which requires a $200 security deposit.

It is possible to improve a poor credit score. The bad marks can go away after seven years for delinquencies and ten years for Chapter 7 bankruptcy.

With time, your credit score can go up organically as you refrain from adding more debt and pay your bills on time. At the very least, making the minimum payment each month will help improve your history of on-time payments and lower your debt-to-credit ratio.

In the meantime, you can learn about the most common credit card mistakesso that you feel confident using one again and understand exactly how to abide by your terms and agreements.

"Many times, people fall into the trap of assuming that if they pay nearly enough to cover the minimum payment, or miss the due date by only a few days, that this should somehow count and they shouldn't be penalized," Ulzheimer explains.

"But if you can snap out of this kind of thinking, you are going to wake up one day and see a better score. You are usually no more than seven years away from great credit— I promise you that."

To determine which credit cards offer the best value, CNBC Select analyzed 234 of the most popular credit cards available in the U.S. We compared each card on a range of features, including: annual fee, minimum security deposit, credit limit, rewards program, introductory and standard APR, welcome bonuses and foreign transaction fees, as well as factors such as required credit score and customer reviews when available. We also took into account how easy it is to upgrade the card from secured to unsecured and how quickly you can get your security deposit back.

Because it's unusual for secured credit cards to have robust rewards programs, we did not analyze how many rewards points you can earn in the first year. For cardholders who are looking to rebuild credit, it's more important to practice good credit card habits — spending within your means, paying your balance on time and in full — than try to optimize your points balance.

*Information about the Capital One Savor Cash Rewards Credit Cardhas been collected independently by Select and has not been reviewed or provided by the issuer of the card prior to publication.

For rates and fees of the Discover it® Secured Credit Card, click here.