Credit has become the normal way many modern consumers buy expensive items such as homes and cars and today, is used by many for everyday purchases from groceries, gas or even a pack of gum. Maintaining good credit is now more important than it was in the past and your credit score is used in many more aspects of your life. While most people have some type of credit, few realize a bad credit score can have consequences even when borrowing money is not an issue. There are many hidden costs that come with bad credit and sometimes perks that come with good credit. Here are several examples of how your credit score can impact you and your finances.
The Cost of Credit
It has always been a standard rule of credit that each dollar borrowed will carry an added amount for interest, and the consumer’s cost is generally less when their credit is good. Maintaining a good credit rating will keep the cost of borrowing money down, and consumers who borrow money will be sure to see savings if they maintain good credit.
If a consumer has good credit, they will benefit by getting a lower interest rate on collateral loans such as a mortgage, line of credit or vehicle. Companies that specialize in credit make their decisions based on credit reports or scores, and consumers are assigned interest rates based on their ability to repay loans as well as stay out of debt.
When there is no collateral given for a loan, the interest rate tends to be higher. Credit cards and signature loans fall into this category, and the interest rate is based on the consumer’s credit history. Maintaining good credit translates directly into a lower interest rate on this type of loan.
Compromising Lifestyle Choices
It can be difficult in many areas of the country to afford a nice home in a good neighborhood, but the cost of a bad credit rating might keep home ownership out of reach. Living in any particular neighborhood is a lifestyle choice, and getting the most for each hard-earned dollar is important to buyers. Being able to afford the best possible lifestyle has always been a balance between cost and needs, but bad credit shifts the balance in favor of costs. Even a few extra dollars in mortgage payments can break a budget, so it is important to maintain good credit to ensure that cost and necessities stay in balance. Good credit is the first step in being able to make lifestyle choices that will be beneficial.
How Credit Impacts Your Life
Buying a House
It has been traditional to save up a down payment for a house, and then finance the balance with a mortgage. Buying a home offers significant tax savings through the mortgage interest deduction on federal taxes, and it gives consumers a good reason to own rather than rent. While mortgage payments are not enjoyable, they do offer advantages to those who want to own their own home.
Today’s higher home prices have made it difficult to save up a large deposit, but there are a wide range of mortgage programs that require little or no money down when buying. For those with good credit, the ability to get a lower interest rate saves them thousands of dollars over the life of the mortgage. Their monthly payment will be lower, and they may be able to afford a larger home with the money they will save and build equity quicker.
Those who have bad credit will pay a higher interest rate for their mortgage, and they may also be required to make a larger down payment. One overlooked fact in this scenario is private mortgage insurance (PMI), and it is one of the highest costs paid in today’s home market. Banks require 20 percent down for a home loan, and they are allowed to charge mortgage insurance until that percentage has been reached. Buyers who have a higher interest rate due to bad credit will find it may take years longer to build that much equity in their home, and they will have to bear this often hidden cost until they reach their goal.
Renting a Home
There are many reasons people might choose to rent a home, and lack of maintenance cost is one of the major reasons. Some consumers rent until they can save up a down payment to buy a house, and they look forward to the day they will be building equity in their own home. Modern landlords see their rental property as an investment, and they have found there are agencies that will help them investigate the credit ratings of potential tenants. They are seeking quality tenants, and they believe a renter with good credit is more likely to respect their property as well as pay rent on time. Potential tenants with bad credit may find it difficult to rent a home in a good neighborhood, or they may be forced to pay a larger security deposit to secure the home they want.
The Cost of a New Vehicle
Dealerships invest a great deal of money to advertise their vehicles, and the payment prices in their ads are often enticing to those who need a new car or truck. Unfortunately, the information that the prices are only for those with excellent credit is flashed quickly on the screen. Consumers who have let their credit slip will find their payments higher because they will not be able to get the lower interest rate. They may also find they are required to make a larger down payment to secure the vehicle they want, and it might keep them from being able to purchase the vehicle they desire.
Credit and Insurance
There are many areas in modern life that require insurance such as home and cars. Insurance companies always consider the risk of a claim being filed as an important part of their premium calculations, and they use an insurance score for their determination in many of their policies.
When a person purchases insurance, they are given an insurance score that takes into account their credit history. This score relies heavily on a person’s payment history and total amount of debt. Consumers with low debt and a good record of paying bills on time will receive a higher score and lower insurance premiums.
Insurance companies have long relied on statistical averages to set their prices, and the use of credit scores has a respectable history in regard to claims. Auto insurance as well as home insurance uses the credit method of scoring widely. While auto insurance agencies have begun to use credit as a reliable way to base their premiums, many drivers can still get their policy based on their driving record. Many of them now give drivers a choice, but credit scoring may become the most acceptable way to set prices in the future.
Opening a Bank Account
Good credit might be the last thing on a consumer’s mind when they drop into a local bank to open an account, but it can be an important factor in their ability to even be considered as a customer. Defaulting on loan payments or having unsatisfied debt are items banks look for, and they can be used as a reason to refuse service. While there are many check cashing options available today, most of them charge a percentage of the check to cash it, and the cost of their services adds up over time. This is one area where maintaining good credit pays for itself.
Securing a Credit Card
There are always mishaps in life, and a credit card or a line of credit can be a huge help when life gets off track. Emergencies are often expensive, and even a small vehicle accident can break a family budget. Insurance helps, but deductibles can be difficult to come up with when repairs are necessary. An unexpected doctor visit is another area where emergencies occur, and it is another reason a person might need to have access to credit for a good outcome.
A consumer with good credit usually has a credit account or credit card that will help them through these types of situations, and they can look forward to lower interest when paying the balance. For those with bad credit, they may have to get a credit account where they prepay for the card. This will help them build up credit, but even a normal credit card or credit line will tend to have higher costs in interest and an annual fee.
There are few people who will go through life without being hospitalized, and their ability to pay with credit may save them thousands of dollars. Health insurance policies generally come with deductibles, and the majority of them also leave the policy holder open to paying a percentage of the covered costs. Hospitals are often willing to work out a payment plan for these costs, but consumers who can pay within the first 30 days are often given a discount. This saves the consumer money, and it is just one more way maintaining good credit will pay off.
Rental Vehicles without Credit
Renting a car or truck has become increasingly difficult without a credit card, but it can be done. Many rental agencies require at least a debit card, and they block out more than the rental fee when they ring up the sale. Rather than get stuck for damages that would automatically be covered by the credit card, they reserve a block of cash to cover possible mishaps. Consumers with bad credit may find the lack of a credit card will cost them more than they expected, and it can also affect their life in many ways. If they have paid their bills with checks from the account, they may find themselves overdrawn when the checks are cashed. The fees for bounced checks will add up quickly, and they may find late fees being assessed by companies that were not paid on time.
Few people are aware that employers have the right to check their credit, with their written consent, if they are seeking employment where they will be in charge of cash or have fiduciary responsibility. While it has been traditional to check credit on only applications who will earn more than $25,000 per year, the federal government does allow credit checks for any employment position. According to the online legal encyclopedia, NOLO, many states have enacted laws that limit the employer’s ability to check credit. Many of these laws deal with protecting potential employees from discrimination, and employers must provide an applicable reason to check credit such as fiduciary responsibility.
While few companies check every potential employee’s credit, some employers check credit to satisfy their insurance company, and those with bad credit may be considered a risk due to mismanagement of their own money. The potential employee must give written consent for this check, and they must be provided with a copy of their credit report if they are refused employment. Employers running credit checks on potential employees do have to follow the Fair Credit Laws, and the credit report can be disputed if the potential employee believes it was used to discriminate against them. Working to ensure good credit may be the key to a promotion, and it certainly won’t hurt when looking for a new job.
Financing Education through Federal Student Loans
A college degree has become more important in today’s job market, and access to education through federal student loans is one way to get a degree. Some people return to college to advance in their career, but others have decided to go to college for the first time. Obtaining a student loan may be the only way college is affordable, so eligibility for a loan is important.
There are a number of reasons to be rejected for a federal student loan, but this is one of the few loans where good or bad credit is not necessarily an issue. According to the U. S. Department of Education, some of the common reasons for loan denial are default on a previous federal student loan, failure to make academic progress or having a debt owed to the United States government. While none of these denials are due to bad credit, good credit will help pay off any debts or defaults at a lower rate so going back to school is a reachable goal.
Checking Your Credit
Identity theft has become a major issue today, and consumers need to check their credit on a regular basis. The government allows consumers to request a free credit report every year, and it is a good way to maintain a good credit rating. While credit reporting agencies do their best to keep accurate records, errors can occur. These mistakes can bring a consumer’s credit score down, and repairing them generally takes very little time and effort. If a bad credit rating has become an issue, this is the first step in repairing credit.
Making Debt Payments
There are many times in life when important items fall through the cracks, and debt payments may be one of the items that have been lost through time. Credit companies do not relinquish their debt, and consumers who have defaulted on loans may find this is keeping them from having good credit. Most companies will accept reasonable payments, and consumers can use credit counseling agencies to help them negotiate a new payment plan. While it may take years to repay an old loan, a credit rating can go up if payments are made on time for the agreed amount.
Maintaining Good Credit
Few consumers realize how much good credit has become a part of modern life, but those with bad credit constantly run into issues when trying to meet their daily needs. There are many ways to improve credit ratings, and consumers who have learned costly lessons should begin repairing their credit immediately. Bad credit does not have to last forever, and maintaining good credit can make life easier and less expensive in the long run.