You probably know that bad credit can make loans more expensive, due to higher interest rates.
But did you know it can make other aspects of your life more expensive? Providers of the following services may check your credit – and either require you to pay more up front or pay more with every bill.
1. Auto and home insurance
The insurance industry knows, thanks to much research, that those with bad credit tend to file more claims. So, along with your claims history (generally the most important aspect in underwriting decisions), an insurer may take your credit into account.
If your credit is bad and the insurance company decides to insure you anyway, it might take measures to justify the risk it’s taking.
“You could find yourself paying higher premiums because of your credit,” says John Ulzheimer, credit expert and author whose experience in the consumer credit industry has included FICO and Equifax. In rare circumstances, he says, you may be denied altogether.
While that may seem harsh, remember that the insurance company is simply making a business decision.
“You don’t have a right to insurance,” Ulzheimer says. “It’s a product you have to apply for.”
You’ll still be able to sign up for public utilities, and the service itself won’t cost you more. However, because bad credit can indicate difficulty paying bills, you may have to pay more up front.
“You might be asked to put a deposit down,” Ulzheimer says. “That deposit is an appropriate step they take to subsidize your risk if have bad credit.”
While the provider will likely refund your deposit after the requisite number of on-time payments, the deposit may be an unwelcome extra expense when you move into a new place.
If your credit is bad enough, you can be denied rental housing. Or, it may cost you more to secure housing. Landlords often charge a range of deposits, Ulzheimer says, from no deposit to several months’ rent. The worse your credit, the higher on that spectrum you can expect to be.
4. Mobile phone service
Surprised at this one? Think about it: The wireless company is giving you access to their services and network and then billing you later (at the end of the month). If you don’t pay, the company loses money.
For this reason, you may be forced into a prepaid plan, says Ulzheimer. Or, you might be enrolled in a special program for those with poor credit that tacks on an extra fee for the privilege (we’ll get to why one giant mobile carrier recently got in trouble for that in a moment).
Do companies have to tell you they’re charging you more?
Simple answer: sometimes.
The full, more complicated, answer lies in the Fair and Accurate Credit Transactions Act (FACTA), which is an amendment to the Fair Credit Reporting Act (FCRA). It requires companies extending credit to provide a risk-based pricing notice to any consumers who are offered terms that are “materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through” the same company.
None of the service providers above may appear to be “creditors” in the traditional sense. However, the FTC deemed that Sprint was acting as a creditor – and sued it for failing to issue risk-based pricing notices after enrolling consumers with poor credit in a special program that comes with a $7.99-a-month fee.
There’s nothing illegal about the separate program or the fee itself, Ulzheimer says. The problem was that Sprint didn’t send out risk-based pricing notices to the consumers it enrolled in the special program. The fact that the carrier provided services and charged later, the FTC argued, made it a creditor – meaning it’s bound to FACTA.
“It’s a nuanced interpretation of the word ‘credit,'” Ulzheimer says, adding that Sprint could have potentially pushed back. However, the carrier settled for $2.95 million.
“At the end of the day, it would have probably cost Sprint as much to fight it as they’d end up paying,” Ulzheimer says.
Whether the other service providers mentioned above have to send you a risk-based pricing notice depends on the circumstances. If your application is denied outright, you may be entitled a different kind of notice – an adverse action notice. Ultimately, though, it’s up to the FTC to determine whether there’s been a violation regarding notices. And some businesses send out notices as a matter of course, Ulzheimer says, to cover their bases.
Should you sue a company if it doesn’t give you the correct notice?
If you weren’t given a notice and feel you’re entitled to one, you technically have recourse. The FCRA entitles you to statutory damages of up to $1,000 per incident.
Don’t get too excited, though.
“You’re probably going to pay 10 times that to an attorney,” Ulzheimer says. “So you have to ask yourself if you’ve been harmed to the extent that you’re going to push the issue and go into a multi-year quagmire for $1,000.”
If you decide to go forward, and your attorney is able to determine that there are other consumers in your situation, you may end up as part of a class-action lawsuit with you as the lead plaintiff. In that case, you might go home with a bit more money.
“At the end of the day, you’ll get your relatively small amount of money, and the lawyer will make a mint,” Ulzheimer says.