Having bad credit can be expensive. What’s on your credit reports and credit score can affect how much you end up paying in many parts of everyday life – from interest on loans to getting a job offer. Monitoring your credit reports and knowing your credit scores is critical. Here are some ways that credit can affect your money and how much of it you have left over to save.
First, some quick definitions
Reflects credit payment history. It shows all lines of credit (i.e., loans, credit cards, etc) with notes on whether each payment was paid on time, was late or in default. It also lists any bills that went to collections, any businesses that looked at the credit report as well as any applications for credit.
Credit reports are available for free once each year from each of the 3 reporting agencies (Equifax, Experian, Transunion) by going to AnnualCreditReport.com.
*Tip: set calendar reminders to pull one credit report every 4 months*
Combines several factors including:
- payment history on credit report
- total amounts owed versus available credit
- length of credit history and
- any new credit lines opened
This information is summarized and then scored into a 3-digit number, usually ranging from 300 to 850. The higher the score, the better.
There are a few companies that do credit scores, but the most commonly used is the FICO credit score.
*Tip: check if your bank or credit card company offers free FICO score as an account benefit*
Ways Credit Can Affect Your Money
1. Credit Affects What You Can Borrow
This is the most well-known use of both credit scores and credit reports. Lenders prefer to lend money to people they think are most likely to pay them back. One of the main ways lenders decide this is by looking at the borrower’s credit score.
The higher the credit score, the higher the chance the borrower will repay the loan on time.
Borrowers with higher credit scores are rewarded with lower interest rates.
This applies to most types of loans including mortgage loans, auto loans, student loans and personal loans.
2. Credit Can Affect Insurance Costs
Many auto and homeowner insurers use credit scores to help them come up with the insurance premium (i.e., how much they charge you).
They believe credit scores can predict the chance of someone having accidents and filing claims. In other words, a higher credit score is likely to get you a cheaper policy.
Likewise, an unexpected rise in premium may be linked to a negative item popping up on your credit report. If this happens, it’s good to speak with the insurer to figure out the cause of the problem and how to fix it.
3. Credit Can Affect Your Job Search
Job seekers, pay attention!
Some employers look at credit reports as part of their background checks. While most employers only do this for certain positions, according to Kiplinger, about 13% of employers check the credit reports of all job candidates.
A history of late pays, defaults or items in collections can affect whether or not they make a job offer.
4. Credit Can Affect When Renting an Apartment
Many landlords pull potential tenants’ credit scores when deciding whether or not to lease to them. This is used as a gauge of the renter’s ability to pay their rent on time.
It can also affect what deposits they ask for. For example, when getting my first apartment, I was able to argue away a non-refundable deposit.
Good credit can be used as leverage when negotiating.
5. Credit Affects Utility and Wireless Service Deposits
Your credit score can affect utility deposits. While it should not affect monthly utility charges, it can affect what deposits they require.
A higher credit score can save hundreds in deposits from utility companies such as water, electricity and even cell phone service.