Your credit score matters. Whether you monitor your credit regularly or ignore it until you need to apply for a loan or finance a big purchase, your credit score impacts your finances daily. According to Experian, the best credit scores are at 700 or higher. However, most people have a credit score on the low end of good in a range between 600 and 750.
Wondering why these numbers matter? Having a low credit score can hurt you financially by costing you more – from higher bills and interest rates to disqualifying you from that high-paying dream job or a new home you want. Furthermore, bad credit can follow you. It can take between five to ten years for missed payments, delinquent accounts, and other hits on your credit to stop affecting your score.
Higher Bills and Interest Rates
Poor credit means basics may come at a higher cost. From your bills to your credit card purchases, your credit is likely a factor in the lender’s repayment terms and you will pay more than if you had better credit. Utility companies, insurance companies, and even cell phone providers often look at your credit before engaging in business with you to determine what kind of terms to offer, if any.
- Many utility companies run a credit check before setting up a new account. If you have poor credit, the utility company may require a security deposit before agreeing to turn on service, and there may be additional fees required.
- This is true for insurance companies, too. In fact, there are even credit-based insurance scores. So, if you have a low credit score, you can expect to pay higher premiums even if you have never filed a claim.
- Cell phone companies often consider your credit before entering into a service contract with you. If you have a low credit score, you could be denied a contract completely or be required to pay costly additional fees. Without a service contract, you could have to use a prepaid phone option which could cost you more, or no cell phone at all.
A low credit score can set you up for continued financial strain. It can be difficult to refinance your mortgage, student loans, or other debts if you have poor credit. Unless you have a cosigner with good credit, you may not be able to find a lender willing to refinance your debt. People refinance their loans for many reasons, including when financial circumstances have changed. If you are unable to refinance, you could be stuck paying higher interest rates under strict repayment terms resulting in continued low credit.
You may also be denied a line of credit completely. Lenders only know you by your credit score. To them, that number is your identity, your character, and your reputation. If your score is low, lenders see unreliable and high-risk. In the event you are approved for a loan, low credit scores often lead to high-interest rates, extra fees, and short repayment terms that may be difficult to budget.
Limited Employment Options
You may wonder what your credit score has to do with your ability to get a job, but just like lenders look to your credit score to see how reliable you are, so do many employers. Poor credit can not only be an indication of unfavorable character qualities, but it can also deter employers who want to avoid dealing with garnishments and collection calls at the office. Therefore, if you have poor credit, it can hurt you financially by keeping you stuck in your current position or pay grade preventing the opportunity to advance your salary. This is especially true in certain industries, like finance.
Limited Housing Options
Whether you are looking to rent or ready to purchase a home, your credit is a significant factor. If you have a low credit score, it can be a costly, uphill battle to settle down where you want. A credit check is one of the first things done before a rental application will be approved or before a mortgage for a new home purchase is approved.
If you have poor credit, a landlord may deny renting to you as a precaution to avoid unpaid rent. However, in less desirable markets, you may have no trouble renting since there is often less competition in unpopular neighborhoods.
It can be difficult to get approved for a mortgage if you have poor credit. Often a low credit score means there will be a higher down payment required in addition to extra fees and a higher interest rate. If you want to purchase a home, it is wise to take some time to improve your credit before applying for the mortgage to improve the borrowing terms available.
All is Not Lost: Boosting Your Credit Score
So, what can you do to improve your credit score? Prioritize paying off debt to improve your credit utilization ratio. This is an important factor in determining your credit score. Make sure to pay all of your bills on time and avoid hard credit checks that drive down your score by limiting new lines of credit to necessity.
Creditors look to your credit score to gauge your reliability. It will take some work to improve a bad credit score, but staying committed to timely bill pay and debt reduction will prove your reliability and result in more favorable terms when you do have to borrow money and of course, a higher credit score.