Monitoring our credit reports and knowing our credit scores is critical. How we handle credit affects many parts of everyday life – from what we pay in interest on loans to whether or not we’re offered a job. Managing credit directly affects our wallets and our ability to have money left over after bills to save and invest for the future.
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, most often 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*
5 Ways Credit Affects Our 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 the people that are most likely to pay them back. One of the main ways lenders determine a borrower’s ability to repay is by looking at their credit score. The higher the credit score, the higher the chance that 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 Affects Insurance Costs
Many auto and homeowner insurers use credit report information as one of the main factors in developing individual insurance policy scores. Insurance policy scores are used to predict the chance of the policyholder having accidents and filing claims. In other words, a policyholder with no late pays, defaults or items in collections is likely to be quoted a cheaper policy. Likewise, an unexpected rise in premium may be linked to a negative item popping up on the policyholder’s credit report. If this happens, it’s good to speak with the insurer to figure out the cause of the problem and draft a plan to fix it.
3. Credit Can Affect Your Job Search
Job seekers, pay attention! Some employers look at candidate 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 tenant’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 negotiate away a non-refundable deposit. Good credit can be used as leverage when negotiating for better deals.
5. Utility and Wireless Service Deposits
A credit score should not affect monthly utility charges. However, 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.