How Bad Credit Can Put You in a Hole
Credit is a big part of your finances. Today, nearly everything you do is impacted by your credit situation. As a result, it’s increasingly important to pay attention to your credit score. You might not get a loan at the rate you want if your credit is sub-par.
But what if you don’t plan on getting a loan anytime soon? You might think you have time to worry about your credit later – or even feel that as long as you don’t borrow money you might not ever need to worry about your credit.
It’s a nice thought, but this isn’t the case. Your credit history no longer just impacts whether or not you can borrow money. Your credit is a stand-in for your financial reputation. Even when you aren’t looking for a loan, someone might be checking your credit and making judgments about your money management skills.
Credit Score Ranges and Quality
|Credit Score Ranges||Credit Quality||Effect on Ability to Obtain Loans|
|300-559||Very Bad||Extremely difficult to obtain traditional loans and line of credit. Advised to use secured credit cards and loans to help rebuild credit.|
|560-649||Bad||May be able to qualify for some loans and lines of credit, but the interest rates are likely to be high.|
|650-699||Average/Fair||Eligible for many traditional loans, but the interest rates and terms may not be the best.|
|700-749||Good||Valuable benefits come in the form of loans and lines of credit with comprehensive perks and low interest rates.|
|750-850||Excellent||Qualify easily for most loans and lines of credit with low interest rates and favorable terms.|
Forget About a Mortgage, It's All About Renting
Homeownership is declining. At first glance, this appears to back up the idea that you don’t need to worry about your credit. After all, if you don’t get a mortgage, what do you need a credit score for?
Increasingly, landlords are checking credit. This is especially true if you want to live in a rental with better amenities. Your landlord doesn’t want to run the risk that collecting the monthly rent will be difficult. On top of that, the assumption is that if you have good credit, you will probably pay on time, and you will be less likely to move out without paying your final month’s rent.
Tenants with bad credit might be passed over for a rental. If you have a “thin file” or poor credit, and you are approved for a rental, you might be required to pay a higher security deposit.
Browse and Call Without Hassle
When you sign up for Internet or cell phone service, pay attention. There’s a good chance that the sales rep will ask if they can check your credit before setting up your service.
Some providers insist that they aren’t performing a hard pull and that the inquiry won’t impact your credit score long-term. Whether the service provider uses a soft pull or a hard pull, though, the reality is that your credit matters, even though you aren’t borrowing money.
If you plan to buy a smart phone when you set up your service, your credit can impact the types of offers and payment plan you are eligible for. When it comes to Internet service, you might be required to pay a month ahead of time if your credit doesn’t meet the preferred standards.
The Internet and cell phone providers don’t want to have trouble collecting monthly payments for service. Even though you aren’t borrowing, your credit history can offer insight into the way you’ve handled regular payments in the past, and service providers can use that information when making decisions about you.
In some states, insurance companies are allowed to look at your credit history and use it in determining your insurance premiums. According to the Insurance Information Institute, your credit history is used to determine your insurance score, which in turn can be used to measure your risk and set your premium.
According to research cited by the Insurance Information Institute, there is a connection between how someone manages his or her money and the number of insurance claims made. If you are responsible with your money and keep a good credit score, the assumption is that you will show equal care in other areas of your life – including driving more carefully and avoiding accidents and behaviors that can lead to insurance claims.
Not all states allow insurers to use your credit information when setting premiums. However, if you live in a state that does allow it, having no credit or poor credit could mean a higher premium, costing you extra money every single month.
Finding Your Dream Job
An employer isn’t supposed to check your credit score, but a version of your credit report is accessible. When performing a background check, an employer can request a special version of your credit history. If your credit report has any red flags, it could cost you a job.
You don’t have to authorize a potential employer to check your credit history, but some employers might think you have something to hide if you aren’t willing to cooperate.
In some career fields, the ability to manage money is vital. If you are working in the financial industry, you might be expected to have good credit. In other cases, an employer might worry about the security risk. If your credit history indicates that you might have financial troubles, an employer might be nervous that you could accept bribes in exchange for corporate secrets. Another fear is that highly-placed employees might be tempted to embezzle if their finances are strained.
If you look like a risk, an employer won’t want to hire you no matter your other talents, and you might be passed over in favor someone who doesn’t look like as much trouble.
Don’t Let Your Credit Cost You
Over your lifetime, the cost of having little credit or no credit can add up, even if you never plan to borrow anything. If you are required to pay an extra $100 for a security deposit each time you move to a new place, you can start to see an impact on your budget.
Insurance costs can result in even bigger losses over a lifetime. Even if your credit situation only adds $15 per month to your insurance premium, that’s $180 a year. Keep paying that over your lifetime, and you could pay thousands of dollars more than necessary.
There is no telling how much missing out on a great job opportunity can cost you. Whether you are passed up for a promotion after your bosses see your credit history, or whether a new employer uses your background check (including your credit) to dismiss you from consideration, the lost earnings could mean a big difference in your finances down the road.
Of course, at some point, you might decide to apply for a loan. At that point, your poor credit or lack of credit can prevent you from getting the financing you need. If you do end up getting the loan, you might pay hundreds – or even thousands – of dollars more due to interest charges because the lender views you as a risk.
Your credit isn’t just used for borrowing decisions. If you aren’t careful about the way your cultivate your credit history and score, there is a good chance that it will cost you thousands of dollars over your lifetime.