We hear a lot about how important it is to have a good credit rating. Indeed, we are often told that having good credit is important, but we aren’t told why. For those who prefer to use the money they already have, and do not want to be involved with credit, a good credit rating seems superfluous. If you don’t use credit, why would you even care about your credit score? A good question. And one that deserves consideration.
Your Credit Score and Getting a Loan
Obviously, if you are going to be applying for loans and using credit, your credit score will be important. Your credit score does two things when it comes to your potential loan:
- Establishes whether or not you will get the loan. If you have a credit score that reflects a poor credit history, you will have a difficult time getting the loan. The first thing your credit score does is establish whether or not you will qualify for a loan.
- Determines your interest rate. Once you qualify for a loan, your credit score is considered when determining your interest rate. Interest is the fee you pay for the privilege of borrowing the money. If you have a high credit score, it means that the bank sees you as a smaller risk of default, so you get a lower interest rate. However, if you have a low credit score, the bank will see you as a bigger risk, and penalize you with a higher rate. Over the life of a loan, this can mean a difference of thousands of dollars.
Even if you don’t plan to use credit cards and you save up money to buy your cars with cash, there is a good chance that you will need to get a mortgage if you plan to buy a home. Mortgage lenders are especially picky about borrowers, and a good credit score is important if you want to get a good deal on a mortgage.
How Credit History Affects Your Non-Credit Transactions
Increasingly, your credit score affects items we don’t normally associate with lending. Indeed, your credit score is increasingly being used as a measure of general fiscal responsibility. Some argue that this is unfair, since truly responsible behavior, that involves using cash and not borrowing to pay for things, would result in a lower credit score. Fair or not, though, credit is being used as a general financial yardstick.
Here are some of the ways that your credit score may impact you — even if you aren’t borrowing money:
- Insurance Premiums: Auto insurers, especially, consider your credit score when setting your premiums. A lower score can result in a higher premium — even if you have a decent driving record.
- Housing: If you rent, your landlord may check your credit score. Some landlords require a certain score before allowing you to move in. In other situations (my sister found this out the hard way), a low score may prompt a landlord to require a slightly larger security deposit before the tenant moves.
- Employment: Those involved in sensitive industries might have their credit files checked. In some cases, poor credit history may result in you being passed over for a job.
- Service Providers: Have you signed up for cell phone service recently? Or got a new satellite TV service? If so, you might have been surprised that the provider wants to run a credit check. Some service providers require a minimum credit score before letting you sign up.
The fact of the matter is that your credit score is becoming an increasingly important part of your financial life, even when the connection isn’t immediately apparent.
Miranda is a professional personal finance journalist. She is a contributor for several personal finance web sites. Her work has been mentioned in and linked to from, USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, The Wall Street Journal, and other publications. She also has her own blog at Miranda Marquit.
That any you never know when you might change your mind in the future and wish you had a better credit score!
I couldn’t agree with this more. As you illustrated, maintaining a good credit score is just a matter of being practical. Too many businesses use our credit score to determine how they are going to conduct business with us to ignore it.
This is a great point Miranda. So many people ignore credit rating if they don’t use a credit card, but at some point, almost all of us will NEED a good credit rating. It’s not to say we need to take on debt, but we should not be ignoring trying to build our credit rating. Because when we do need it, it will make a world of a difference.
I’m a landlord, and I always check my potential tenant’s credit. I don’t care how much debt they have, but I look directly at whether they have ever missed a payment or been late. This tells me that they may not be reliable in paying the rent. Also, I look at how much they are paying monthly on their debt, and look at their income to decide if they can actually afford the rent, or if they will need to move out in a month or two.
On the one hand I understand the need to see an individual’s track record in financial responsibility. On the other hand I think this system is abused by corporations to take advantage of situations where they shouldn’t – to justify charging more. For example, why should insurances charge higher premiums if someone has an average credit rating? The person either pays, or they don’t, and if they don’t, the insurance is cancelled. Sorry, but it’s a very covert way of sucking more money out of our pockets when abused this way. I also think, running a credit score simulator, that… Read more »