When it comes to how people think about their credit score, they often have the misconception that it only matters with big life decisions like securing a mortgage or buying a new car. The reality of the situation is that credit scores are often factored into many other things that affect our day to day lives.
The purpose of this article is to make sure you’re aware of the different ways that a credit score, both good and bad, can be used for and against you. Beyond just a mortgage or auto loan, there are many surprising things that can be affected by your credit score. Understanding credit is a fundamental part of good money management which is a huge advantage in creating a solid financial future.
Outlined below are the different of ways that credit scores are commonly used.
Cable, Phone & Utility Services
When applying for new utility services like gas, electricity, or a cell phone, having a low credit score may affect your ability to open an account. It may also require you to put down a deposit in order to secure these services as a form of collateral. Having a lower score could actually mean higher utility bills too. The contracts for utility services are a form of credit. These companies extend their services to you in advance with the expectation these services will be paid for on a regular basis. And what do utility companies base the decision on whether a new customer must make a deposit for services? That’s right, their credit score.
Customers with credit scores on the lower end are viewed as more of a risk in terms of keeping their account in good standing. If you’d like to join a major cell phone provider for example, a low credit score may require choosing a month-to-month plan that carries higher costs, whereas a higher score might allow you to choose from cheaper plans that require longer commitments via a contract.
The Hiring Process
While most employers aren’t legally allowed to gain access to your FICO credit scores, they are legally allowed to conduct what’s called an employment credit report. They may do so to determine whether you are responsible or would pose a risk to the organization. You would need to give them permission to do so however. While this report doesn’t reveal a credit score (the three digit FICO score) it can provide publicly available information such as foreclosures, tax liens, other judgments, and payment histories.
Obtaining Insurance Coverage
Insurers will check your credit to determine if you meet their requirements for coverage. They often use what are called insurance scores and differ somewhat from standard lending scores, but your financial history and health are a main component in this scoring system.
Securing a Loan
This is the most common use of credit scores. If you want to buy a house outright, for example, you might need to set aside tens or hundreds of thousands of dollars in a savings account, which isn’t feasible for most people. The same goes for auto loans. Big purchases like these need to be financed by most people.
This is the most important and significant loan of most people’s lives. Getting a mortgage makes it possible to own and build equity in the home over time without limiting the amount of money you have on hand for living expenses etc. The amount of interest paid over a 30 year mortgage can really be staggering. That’s why it’s so critical that you get the absolute best interest rate possible. And that means having the best credit score possible.
When it comes to getting a loan for a vehicle, like most things, the higher your credit score, the better your loan terms will be. Average or higher credit scores will have a huge impact on the overall cost of financing a car. This means you’ll be offered superior (lower) interest rates. This is of course due to the fact that you’ve been assessed as a lower risk consumer to prospective lenders. There are other factor to keep in mind here, like your debt-to-income ratio, the loan amount applied for and your down payment. Lower credit scores may require larger down payments to secure a loan as well as higher interest rates.
Often times, would-be landlords will request a copy of your credit report and score during the application process. They may also request your permission to pull this information themselves. In addition to references from your previous landlords, this information is used to try and determine what kind of risk you may be. Lower scores can mean more of a possibility of late or missed rent payments, something that’s obviously very important to landlords.
Freezing Your Credit
Millions of Americans wish they had done this before a fraudulent account was opened in their name or their identity was stolen or tarnished. Simply put, freezing your credit protects you from financial liability when other people attempt to use your information to open new accounts or lines of credit. Even if your credit isn’t the best, it’s still a smart move to keep yourself as protected as possible. Plus, it’s 100% free to freeze your credit.
How To Freeze Your Credit Profiles
There are 3 main credit reporting bureaus: Equifax, Experian & TransUnion. Each of these bureaus needs to be frozen. While it does take a little extra time to freeze all 3, it’s definitely worth it. Plus, all 3 can be set up and frozen online, so that makes the process much more convenient than the days of old when you had to call or write in.
In order to begin the process, you’ll need to go to each company’s website and create a profile. This usually consists of filling out your basic information and answering questions to insure that it’s actually you who’s completing the process. Once you get your profiles set up, you can pretty easily toggle between freezing and unfreezing your accounts. This will come in handy later when you’ll need to unfreeze your accounts when applying for new credit cards or other items of that nature. Pro-tip: bookmark each site and save your login information so it’s super easy to access in the future.
But don’t wait – do this now and protect your identify and financial well-being today!