The majority of people don’t understand just how a credit rating can have a direct effect on their financial life.A credit rating, or credit score, is essentially a number that helps a given financial services provider decide if you are a viable customer for one of their products. Your 3 digit credit score, or credit rating, is just one of many factors that are looked at that can help establish whether or not an individual may be a financial risk to a lending company.
Other elements can include:
- Assets (do you own your own home or do you rent it)
These things are all looked at together, with your credit score, and a lender can then decide, as fairly as possible, whether to accept you for a loan. Obviously, having a bad credit score is going to have an effect on your dealings with lenders, and not just those that offer financial products. There are ways to fix your credit score if it is on the low side, so all is not lost.
As well as impeding your ability to apply for credit, a poor score can also make it more difficult to rent a home, or any other property, and can also hike up insurance premiums to higher levels.
Downsides of a low credit score
Having a low or poor credit score means that you will have reduced, or even no, access to new credit. It also means that you could be refused a credit card, mortgage, car loan or even a new bank account. This is all due to the fact that a low or poor credit score does not indicate financial responsibility.
Of course, the score is not the only thing being looked at but it is an important part of the decision making process. Naturally, the ability to keep up with repayments and pay the loan back is going to be the final decider and so is the most important thing that a lender will look at. If you built up a bad credit history in the past for example, but you know hold down a very well paying job then the lender may choose to not place as much importance on the credit score itself.
The opposite of this is also true. For example, if somebody with a great looking score of 800 and above wanted to loan some cash, you would think that a lender would say yes without thinking about it. What if, however, this same person had no job or a stable source of income? No financial lender in the whole of the world, never mind the U.S. would consider this person as a customer.
If you have a stable source of income, you can improve your credit score over time if you alter the habits that landed you with a poor score in the first place.
Poor score equals higher rates of interest
A low score tells a company that are a potential risk when it comes to credit. Some lenders and businesses will take a risk, but they will offset that risk by making you an offer that comes with higher interest rates than would be usual. Again, multiple areas will be looked at when deciding on the interest rate, but your credit score will be a be part of that.
As an example, consider the difference in interest rates between two people that have credit scores of 760 and 660 respectively. The difference is that the person with the 660 score would be paying an extra $120 a month, on a $300,000 loan amount. On first glance it doesn’t seem that much – it is a large loan, after all – but that $120 a month difference adds up to $37,500 over the 30 years it would take to repay that amount.
That $37,500 could buy at least two vehicles. This is, quite literally, wasted money and all becuase of 100 ‘small’ points off the credit score.
Taking out a new credit card is not so straightforward with a low score
Getting a new credit card gets more difficult if the person applying for it has a low or poor credit score – this is especially true when you consider the current economic climate that we find ourselves in. Even when people have a good credit credit score, well paying secure job and they do everything they are ‘supposed’ to do, banks are still approving far fewer loans and credit cards that they used to.
Auto insurance premiums are also affected
You will find that auto insurance premiums are also directly affected by credit scores, and if you don’t have a great history with making repayments then the company may see that as a sign that may also be late paying your premiums. Again, to offset the perceived risk, they will raise the insurance premiums to higher rates than before.
These insurance companies are in the business of risk management, and they know that individuals with lower credit scores are statistically more likely to make insurance claims. Conversely, those with better credit scores and therefore a better financial history, normally have fewer accidents and accrue fewer traffic tickets. That’s statistics for you, they can be a cruel but surprisingly accurate mistress.
Other things that affect the premiums that you are offered are not even under your control. Things like your age, the distances you would normally travel. Other factors include education level, surprisingly enough, and also the type of vehicle that you drive – although that one is fairly obvious, not to mention understandable.
There are ways to lower your insurance premiums, but that is for a whole other article for a very different website. As it is, you should now have a better understanding of how a credit score can have an adverse effect on your life and why it’s important to keep it as healthy as possible.