One of your most important assets is your credit score. Until you reach financial independence it can have a massive impact on your life. One of my first posts on this site talked about how to utilize this to make money. While your score can allow you to make money on the side, it can also really make your life more expensive if the number deteriorates too far. How far depends on which score is used. The average American score on the FICO scale, the score most discussed, is 695. The score is out of 850. Below 650 your credit score will begin to affect other aspects of your life and cost you money.
Ways your Credit Score can Cost You
First the obvious, a low credit score will cost you a higher interest rate on any type of loan. The best mortgage, car loan, or other loans is only available to those whom have good credit scores. With a bad credit score, your only loan possibilities will probably be Payday Lowns and Lending Club. You’ll pay dearly for that privilege with rates in the 20-30% range as opposed to good credit 4% rates.
You could have difficulty getting an apartment. Rental complexes use your credit rating to determine how risky you are which may lead to them not taking you as an occupant. You could make all the money in the world but with poor credit you might end up living in a crappy apartment with no alternative.
Utilities like phone, electric, and cable companies generally require a security deposit if you have poor credit. This allows them to lower the risk of not getting paid.
Cell phone companies also may shun you except month to month and prepaid plans. If they do take you, they will likely charge you more for the risk.
Some employers check credit reports as part of the background check. Especially in the finance world, you could find yourself rejected for a job application based on your credit history.
Insurance companies also do credit checks. Their theory is that poor credit history is tied to a higher number of filled claims. They do raise your rates based on poor credit history. In fact, in my state they even have provisos to push the companies to regularly check your report incase your credit history improved so you can get a lower rate.
Finally a poor credit score can obviously impact your ability to get credit cards and other debt instruments.
What Impacts your Credit Score?
- Prior Bankruptcy – It will stay on your record for 7 years, so likely not much can be done here until that time is up.
- Not Paying your Bills on Time – Typically, they don’t report until 30 days after due date, though I wouldn’t count on it. Again, it stays on there for 7 years. Debts sent to collections especially cause issues.
- Total Amount Owed – Owe more than you make a year and you will likely have problems. Pay it down and your credit will improve.
- Too high a dollars loaned to total available revolving credit (Utilization rate) – Once you get below 3, the impact is less and typically mean the difference between a good and a great score. This could mean a few percent on a loan. For this item your credit cards have a credit limit. The percentage of that limit used represents the utilization rate. Pay off some of the debt to improve your score.
- Age of Accounts – The longer your history of credit the better off your score. This comes from 2 aspects:
If you take a bunch of credit right before a purchase it may indicate a future problem.
After 2 years paid on time closed accounts disappear from your report, thus providing a lender with less information to evaluate. Whenever possible do not close credit cards, simply downgrade them to non fee cards and put them in a closet. If you do need to cancel one or 2, the impact will likely be small. If you have no credit cards, consider getting one to develop your credit.
- Too Many Accounts Open- See above, the hoarding of credit options may indicate the potential for a future problem to creditors. Do not open new accounts for credit cards and other things immediately prior to a major purchase requiring a credit check.
- The types of debt – This one falls in line with the too many accounts open. A mortgage is viewed more favorable than a credit card.
- Number of Recent Credit Inquiries – Again see above regarding the indication of a potential future problem with new credit and debt adoption. Do not have credit inquiries done for example for a credit card right before apply for a major credit purchase like a mortgage.
Do you know your credit score? You can check your credit report yearly for free at annualcreditreport.com. Consider staggering each of the 3 credit reporting agencies to check periodically throughout the year. I am not sure if they provide actual scores. Sites like Credit Karma and several credit cards provide free scores.