6 Reasons Why Your Credit Score Matters
What exactly is a credit score (also known as your FICO score) anyway? It’s a metric, ranging from 300 to 850, that measures how likely one is to fulfill his/her financial responsibilities and obligations; creditors take this metric very seriously. The higher the score is, the better. Having a high FICO score comes with many advantages. Most people start building or “damaging” their credit score during their college years.
WHY DOES THIS SCORE MATTER?
Your credit score can affect various aspects of your life ranging from buying a house to applying for a job. Following are 6 scenarios when credit score matters:
1) Applying for credit cards - As ironic as this may sound, you need to have credit to get approved for credit. So how do you establish credit in the first place? The best way to solve this scenario, especially if you are young and have no credit when you apply for your first credit card, is to apply for a secured credit card with a financial institution (perhaps the same bank where you have your checking account). This means the bank will give you a limit equal to the amount of money you give them to hold as collateral incase you don’t pay for the transactions you put on the credit card. Common limits of secured cards are $250 or $500. Paying the minimum monthly payment or more every month will help build your credit; showing creditors that you are a safe investment. Having credit already established, even I started with a secured credit card, allowed me to get approved for the Chase Freedom card that offers wonderful cash back rewards after accumulating points for your transactions.
2) Applying for a loan - Have you ever dreamed of buying a house or opening a business, your chances of getting approved will be greatly affected by your credit score. In addition, an added benefit to having a high FICO score is that you will get a lower interest rate.
3) Applying for a job - When you apply for a job, typically, you fill out the application, submit your resume, and agree to a background check. This background check could include calling previous employers, verifying that you graduated from the college you stated on your resume, and ALSO checking your credit score. Not all employers will check your score, but you need to be aware that this could be part of the process. Keep your credit score high so you don’t have to worry about getting ruled out for this vary reason.
4) Renting an apartment – Part of the application process to rent an apartment requires that the apartment community check your credit score. A low score will result in having to pay an additional deposit or deny you entirely.
5) Insuring your house or car – Many people are surprised to find out that their credit score affects the amount they pay for house or auto insurance. Of course, this isn’t the only factor but it plays a part.
6) Setting up utility services – Have you ever called your local electric company to set up an account to find out that you have to pay a deposit to get the service? Even utility companies look at your FICO score to determine how “financially responsible” you are. A low score tells them that you are a risky investment; hence, they require that you pay this deposit in the event that you fail to make your payment(s). Yet, another reason to work on improving or maintaining a high FICO score.
As you can see, your credit score affects many aspects of your life. Your credit score is a strong representation of how you manage your personal finances. Don’t let your credit score hold you back!
Did any of these reasons surprise you? Or do you know of any others?
Image: renjith krishnan / FreeDigitalPhotos.net
Excellent overview of credit scores WoF! Having a good credit score takes out uncertainty when making a big purchase. When we applied for a home loan, we knew exactly what rate we would be approved for. We got the rate advertised, no surprises.
Credit scores aren’t perfect, but a good indicator of how responsible you are with money.
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Thanks MC! You’re right, it’s not perfect, but it’s a good indicator. Glad you got the rate you worked hard for
The credit score not only is being used to determine your responsibility level with money but is being used to assess overall responsibility. That is why it is being used by employers for screening job candidates. It is easy to lie on a resume, but you can’t fake a credit score.
cashflowmantra recently posted..How a Dead Russian Guides My Investment Philosophy
Good point CFM – It is easy to lie on paper, but you can’t lie with your credit score.
I’m a landlord, and I would NEVER rent to someone with a low credit score. I need their rental money every month in order to pay the mortgage, and it’s not worth the risk and hassle of possibly having to evict that person if they can’t pay the rent on time. There are plenty of people with good credit scores who are willing to rent.
Excellent point Paula. Thanks for sharing.
Cheaper insurance premiums are a great incentive to keep a good credit rating. When you think about how much more you would have to pay monthly and how much you could have saved you will kick yourself!
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It’s surprising that this isn’t a widely known fact, but it’s very important to know this and how it can benefit you financially.
I’m surprised that your insurance rate is affected by your credit score. The rest of them make sense to me.
Many people find this surprising the first time they hear about it…. I believe there are specific statistics that find a correlation between the two so it gets factored in.
Your credit score is used by many businesses and services to make decisions about what type of risk you are. Nice summary about the uses of credit scores!
Paul @ The Frugal Toad recently posted..Tax Deductions and Year-End Planning Tips
Thanks FT. Great point.
Didn’t know you needed a good credit score to setup utilities, but it does make sense. I still don’t know why the score ranges from 300 to 850. Strange!
Buck Inspire recently posted..These Are Not The Goals You Are Looking For Obi-Wan
You can even struggle to get a mobile phone (cell phone to all you Americans!) with a poor credit rating. This happened to my brother recently. He had to get a guaranteur, which is one way round having a bad credit score.
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Great post. I was recently friend look up her credit report and she was scared as all heck! She literally did not want to look at it… but once she did, it was easier for her to learn about it and make a plan to improve it. … come to think about about, I’ll share this story over at my blog. Anyway, your site is great!
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Hi. Great, straightforward article. I was wondering if you think people who pay off credit cards in full-each month are penalised and have a lower credit score. Is it better to pay a little interest each month?
MultiMillionaireRoad recently posted..Attributes of a good Investor
Thanks for the overview! Here in the UK, companies are great at putting a ‘black mark’ on your credit report accidentally, which can never be taken off. Sure, they can make a note to correct it – but this doesn’t do you any favours with all the automated checking services! Good Post
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