Your credit score affects your life and the future of your finances by dictating the types of products you qualify for and the interest you pay on those products. Learn the impact of your credit score in your everyday life and why lenders and many businesses consider this number important when making financial decisions.
Your credit score is one of the most important numbers that affect your life and financial standing. This is because lenders use your credit score to determine your creditworthiness. As your credit score goes lower, it becomes harder to meet your financial obligations which makes you a risky borrower. For this reason, most lenders will deny you credit. In case you get approved, you will pay a higher interest rate and the terms of your loans will be stricter compared to those with good credit scores.
People with bad credit scores tend to fall behind on their monthly payments or do not pay at all. Since your credit score is calculated using information pulled from your credit reports, your score is a strong indicator of your financial behavior. That is why it is heavily used in the lending industry on all kinds of financial products.
What is a credit score?
A credit score is a three-digit number that usually ranges from 300 to 850. The higher you go in this range, the better your credit score becomes. Three major credit reporting agencies(Equifax, TransUnion, Experian) and other credit rating companies calculate your credit scores using credit scoring models. Common scoring models include FICO Score Model and VantageScore Models which result in FICO Scores and VantageScores.
Your lenders such as banks, credit card issuers, and other businesses that manage your accounts report all your account activities to major credit bureaus. This information is then used to make your credit reports and calculate your credit score. Any missed payments, new account activities, late payments, credit utilization, etc. will all be on your credit reports. Your score will go higher or lower depending on what was reported to credit reporting agencies.
By default, credit scores increase from the responsible use of credit accounts. That is you make all your payments on time, have less credit utilization, do not apply for credit excessively, etc. A positive track record on your credit accounts shows that you are a good borrower or pose less risk. For this reason, you will qualify for more credit and pay the lowest interest rates possible. This is one way your credit score affects your life and finances.
On the other hand, your score goes lower due to misusing your credit accounts. If you use too much of your credit limits, apply for many credit cards, have late payments on your credit reports, bankruptcies, foreclosures, accounts in collections, etc, your credit score will go lower. Having this information on your credit reports will result in a much lower credit score and denial of credit.
How does your credit score affect your life and your finances?
We are in a world where your credit score affects your everyday life. Everywhere you go, businesses are asking for credit scores. Everyone is looking at your credit score no matter what you are applying for. For example, it is unlikely that you will get credit without pulling your credit reports. Employers are also using credit scores to determine who to hire or deny a job. The following are ways your credit score affects your life and finances in general.
1. Your credit score affects your mortgage approval and the interest you pay
Mortgage providers use your credit score to determine your mortgage approval and the interest you will pay. If you have a bad credit score, you will not qualify for a mortgage. In addition, it costs you more to borrow money as your credit score goes lower.
According to QuickensLoans, you need at least a 620 credit score for a conventional mortgage and 580 for FHA loans. Anyone lower than these credit scores does not get approved for these financial products. Your credit score affects your life and finances because it is used to determine how much interest you will pay on these mortgages. The closer you get to lower limits, the higher your interest rates. Those with higher credit scores qualify for the lowest interest rates.
In other words, your score can determine the kind of house you buy and how much it costs to buy that house. For example, if you locked in a lower interest rate, your monthly payments will be much lower. Having low payments makes it easy to afford other life necessities and meet other financial obligations. People who pay higher interest rates due to bad credit and low credit scores find it difficult to afford their monthly payments. In order words, the loans cost them more money which makes them work hard every single day just to make payments.
2. Credit score affects your finances when buying a car
It is unlikely that you will purchase a brand-new car with cash. In other words, you might need to finance your car purchase with a car loan. Before you qualify for the loan, the loan provider will pull your credit report to see if you qualify. Just like the mortgage, your credit score will affect your approval rate for a car loan and the interest rate.
Although there is no limit credit score for getting an auto loan, some lenders might deny you these loans due to a bad credit score. If you get approved with a bad credit score, you should expect to pay a higher interest rate.
According to NerdWallet, borrowers with credit scores of 661 or higher make up almost 65% of car financing products. As the credit score goes lower, the average annual percentage rates(APRs) borrowers pay go higher. For example, people with a credit score between 300 and 500 pay 12.84% APR for new cars and 20.43% APR for used cars on average. You can easily see that the lower your credit score goes, the more it costs you to borrow money. Paying that much APR on auto loans makes it difficult to enjoy your daily life. In order words, your credit score affects your life and finances by determining the interest rates you pay on loan products.
3. Your credit score determines your approval rate and security deposit when renting an apartment or a house
Before credit scores became a thing, landlords focused their attention on other factors such as your income and information from recent places where you lived. Although this information is still used to determine your rental application approval; most landlords also use your credit score as part of your application process.
For example, your landlord can decide to approve you for an apartment if you have a good credit score without checking your references. Every apartment you go to will require you to have a security deposit that covers your rent if you do not pay it off. Your security deposit can also be used to cover cosmetic repairs and cleaning after you leave. By having a good credit score, your landlord can lower your deposit or waive it completely. Instead of depositing an entire month or two months of rent, you might end up depositing only 10% of your monthly rent.
How and why does your credit score affect your rental terms and daily life? It is not the number that creditors worry about. It is what the score represents. A good credit score shows that you pay your bills on time and meet all terms of your credit accounts. If you had financial products before and followed all terms, it is more likely that you will act the same way in the future. That is how your credit score affects your life and finance. Lenders cannot predict the future with certainty. But, they can use your past performance to estimate your future behaviors.
Related: 9 ways to get an apartment with bad credit
4. Your credit score affects your life and finances when refinancing a loan/mortgage
If you did not know that your credit score will affect your life, wait until you are refinancing your loans. Just like any other loan application, creditors must evaluate the risk you pose as a borrower before you can refinance your loans.
When you refinance a loan or a mortgage, you replace the current loan with another loan that comes with its own terms and interest rate. The refinance process will allow you to either lower your interest rate, get equity from your property, or get better terms.
Before you can refinance your loan, however, the lender will check your credit score. If you have a good credit score compared to what you had when you bought your property, you will end up with a much lower interest rate. That is by improving your credit and credit score, you end up moving into a different category of borrowers where you qualify for better terms with lower interest rates.
5. Insurance companies use your credit score to give you better terms
Insurance companies want clients who are financially responsible and abide by the rules. In other words, these companies prefer people who take fewer risks. Risk-averse people take less risk which leads to fewer troubles in their lives. Less trouble means that you give insurance companies free money every single month.
Your credit score helps insurance companies to evaluate how financially responsible you are. A higher credit score means that meet all your financial obligations and take every step necessary to protect your credit. That is why you will most likely qualify for better insurance when you have a good credit score.
A bad credit score can make your life miserable. No insurance company will give you better terms when you have bad credit. The lending industry and financial services are based on risk assessment. The lower your credit score, the riskier you become. Hence, the more it will cost you to borrow. That is how credit score directly impacts your finances and everyday life.
6. Your credit score is used when you are setting up utility accounts and a phone plan
If you own a cellphone, own a house, or live in an apartment, you have probably been asked to provide your credit score when opening your utility accounts. Most utility companies and phone service providers collect money from you every month when you make payments.
Some people fall behind on their balances or never pay their bills at all. That is why having a good credit score shows that you are capable of meeting your monthly payments. Some utility and phone companies give you discounts or waive security deposits when you have a good credit score. In order words, your credit score impacts your life and dictates the terms of your financial obligations.
7. Some companies use credit scores when hiring employees
Hiring and retaining great employees has become a major challenge for many businesses. Traditionally, resumes, references, and interviews are major factors that hiring personnel use to evaluate the qualifications of employees.
In recent years, however, many businesses started including credit scores in their hiring processes. Since credit scores reflect candidates’ credit account activities, a person with a good score is more finally responsible. That is they pay their bills on time, keep up with their accounts, and avoid financial decisions that can put their finances in jeopardy. In order to keep up with these terms, these employees must fulfill the obligations of their jobs and stay employed all the time. A person with a good credit score is more likely to be a good employee. For this reason, some employers prefer candidates with good credit scores.
