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How do credit scores impact my financial future?
Your credit score impacts every aspect of your life. Having a dependable income and good credit opens doors for you. Having bad credit does the opposite. It closes doors to opportunities—all kinds of opportunities, not just loans.
Most Americans gain wealth by buying a home. They can use their home’s equity to help them finance home improvements, pay for higher education for their children, or start a business. Having this type of credit advantage helps people fund opportunities and adds to their net worth. If your credit is poor, you do not have this opportunity.
In the past, credit only mattered if you were trying to get a loan or rent a home. Nowadays, your credit score and credit history contribute to many decisions made about you and your character. Remember when you were a kid, and your grades and test scores were pivotal to getting you into a good school or earning a scholarship? Well, credit scores and credit history are kind of like that, but for adults.
What is my credit score used for?
Here is the jab, your credit score matters more now than it ever did before. True story, a company ran a background check, including a credit check, for a person applying for a contract role! Not even an in-house job. So, improving your credit is critical. It can help you get a good job, rent a nice apartment, pay lower interest rates, and more.
People applying for personal loans or credit cards may be awarded different interest rates based on their credit. Over the term of the loan that can really add up. For example, if you have excellent credit, you may pay around $70 in interest on a $1,000 personal loan. If your credit is poor, you may end up paying over $160 in interest!
If you have poor credit, utility companies such as electric, gas or water companies may require you to pay a deposit to use their services. Deposits can be over $100. Those with good credit often do not have to pay a deposit.
When you apply for insurance, such as car insurance, they will check your credit. Your credit score and the contents of your credit report may influence your rate. However, a few states have laws against this practice.
Some state laws prohibit it, but many states allow potential employers to review your credit as part of the hiring process. They cannot do this without your permission, but you do have a right to a copy of your report and the summary of your rights. This is frustrating to many applicants since if they are looking for work, they may be unemployed and getting behind. If you are unemployed, try to make your minimum payments if possible.
Home and apartment rentals
If you have a poor credit history, especially if you have a bad rental history, your housing options are greatly limited. In competitive housing markets, landlords and property managers can afford to be picky and only select tenants with a good credit history.
Your credit score and buying a home
When talking about credit, many will connect it to buying a home. A mortgage is usually the largest debt anyone will take on. While you can obtain a home loan with marginal credit, how much you will pay in interest will add up in the long run.
For example, for a 30-year loan on a $200,000 house, a person with excellent credit may be awarded with paying over $60,000 less in interest over the loan term. $60,000!
So, don’t be in a rush. If your credit is marginal, take a year or so to improve your credit. In the end, a credit score of 750 compared to 650 will save you thousands in interest payments.
What is a good credit score?
Sometimes it seems like figuring out what a good credit score is tricky or impossible. But it is not. Don’t get frustrated with a point or two. It is okay to just shoot for a credit range. Generally, think of it like this:
- Over 800: You are golden. Good job!
- Over 700: Not bad. You can get approved for most loans.
- Over 600: You have work to do but may still get approved for some loans and rentals.
- Over 500: Get a second job or improve your income to help you pay down some debt.
Should I share my credit report with my partner?
Whether it is a business partner or a life partner, yes, yes, and yes. Since your credit impacts every aspect of your life, it is important to understand each other’s credit situation before any long-term agreements are made.
The concept may seem kinda taboo, but would you rather share credit information now or get turned down for a business loan or home later by surprise? If you understand each other’s financial situation better, you can make more informed financial decisions.
Your credit score greatly impacts your life in ways that you may not have imagined before. Bad credit can prevent you from getting a good job, renting a home, getting good interest rates, and getting low insurance rates. Like your health, it is just something you need to mind and take care of even when times are difficult. Good credit can help you survive challenging times, and it opens the doors to opportunities.
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