6 Unexpected Ways Your Credit Score Affects Your Life
While many of us are at least vaguely familiar with the term ‘credit score’ and know that it’s important to have a good rating, few of us actually understand what a massive effect a credit score can have on nearly every aspect of our lives.
Simply put, a credit score is a three-digit number, ranging from 300 (poor) to 900 (excellent) that represents your credit history. This number tells you as well as potential lenders, employers and others how good you are at managing your money. Having a low number indicates to interested parties that you might be a credit risk, while a higher number signifies that you have a smart history of managing your finances.
While there are fortunately strategies to build a good credit score (like using a secured credit card), it’s essential to also understand why you should keep your credit in tip-top shape. Having a high score is more than just a source of pride.
Here are the top six unexpected ways your credit score can impact your life:
Lower or Higher Interest Rates
Many Canadians are mistakenly under the impression that interest rates for all loans are more or less static and that by and large all Canadians get offered the same rates. This is sadly not the case. A higher credit score means you’re more likely to pay back a loan and thus you’ll be “rewarded” with a lower interest rate, saving you a lot of money in the long run.
A low credit score, however, will be interpreted by potential lenders as a sign that there’s a greater chance you’ll default on a loan. To protect themselves from someone defaulting, lenders will charge high-risk borrowers with a higher interest rate. Of course, that higher interest rate eats away at your disposable income, leaving you with less capital to set aside for an emergency fund, a down payment on a car, a home, and retirement.
Diminished Access to Loans and Credit Cards
Being stuck with a high interest rate because of a poor credit score is tough, but imagine not being eligible for credit at all. People with good to excellent credit scores will usually not have any trouble successfully applying for personal loans, lines of credit or credit cards, whereas those with poor credit scores may be denied loans and credit cards completely, making it tough for them to build credit.
Building a Credit History
Not only will people with high credit scores have greater access to credit, they’ll also be able to maintain and build even better credit scores as long as they continue to manage their credit responsibly. Individuals with bad credit scores have an incredibly hard time ever improving their standard of living, because they can get stuck in a kind of “Credit Catch-22”: It’s essential for these people to carry a loan and/or credit cards to develop a good credit history and improve their credit score over time, yet they paradoxically can’t get credit because potential lenders see them as too much of a credit risk.
Secured credit cards are very useful for Canadians who find themselves in this situation. By making a security deposit to the bank, applicants for secured cards are using cash collateral to more easily obtain a matching (or greater) credit limit. The secured card can then be used to make regular purchases, and the cardholder’s credit score will gradually improve if they continually pay off their credit card bills in a timely manner. The Refresh Financial Secured Visa is a good example of a secured card in Canada, as it has a low minimum security deposit of $200 and is accessible to those with poor credit (even those with bankruptcy or a consumer proposal in their credit history).
Opportunities to Purchase a Home or Rent an Apartment
Credit scores also affect how easy it is for an individual to enter the housing market. Individuals with low credit scores will pay much higher interest rates on a mortgage (thus rendering a mortgage potentially unfeasible) or they may even be denied a mortgage altogether.
Additionally, when an applicant applies to rent an apartment, landlords have the right to check credit scores in order to ensure that the potential renter can make their payments. Those with a poor credit rating will have a hard time competing against others with stellar scores and may struggle in their housing search.
Expanding Employment Opportunities
It also comes as a surprise to many that employers may do a credit check on potential recruits. While not all employers do credit checks, some feel that a person’s credit score can be an accurate reflection of their maturity, organizational and management skills. Credit checks are especially popular in the security and financial services industries, so if you have an interest in working in these fields you’ll want to make sure your credit score is up to par.
Growing Personal Relationships
Think love is all that matters in a relationship? Not necessarily. If you’re trying to build a life and a family with someone you love, a bad credit score could hinder your chances of getting a home and affect your capacity to build a nest egg and retirement savings. These kinds of financial stressors and hardships can put pressure on a relationship. According to a 2017 article in the Chicago Tribune, a study by the Federal Reserve Board found that “…people with the highest credit scores were most likely to form long-lasting committed relationships, and the bigger the discrepancy between a couple’s credit scores, the more likely the relationship will end within the first five years.”
Now that you’re aware of the six critical ways your credit score can impact your life, take this opportunity to refresh your finances. Begin by checking your credit score to find out where you stand, and then build it up steadily by securing a credit building loan and a credit card.
* This post was sponsored by Refresh Financial. The views and opinions expressed in this blog, however, are purely my own.