A Good Credit Score Means More Than Just Getting a Loan

September 6th, 2020 by admin Leave a reply »

When you think of the benefits of having a good credit score, you usually start with how your score affects your ability to get financing. A good score makes it easier to get a loan such as a car loan or mortgage, and it is key in getting a low-interest rate. A bad credit score will make lenders leery of giving you money so even if they are willing to approve your application (something that certainly isn’t a sure thing now days), they are going to make you pay more for the loan in the form of higher interest rates to offset the risk that you will default on the loan.

Because of how your credit score gets factored into loans, the simple three digit number that is your score can play a huge role on your overall quality of life. They way it limits or opens up opportunities can determine the size home you are able to purchase, the car you drive, and how much of your earnings go toward assets that increase your overall wealth versus generating profits for the bank (which can affect future big-ticket purchases, your children’s education, your retirement, etc.).

But this is not the end of the story. Credit scores which were initially created as a tools lenders could use to quickly determine credit risk, as opposed to digging through each item of your credit reports in an effort to determine your credit worthiness, have been adopted by other industries as well.

Today, not only will your credit score play a role in how your paycheck gets spent, it can affect how much is in your paycheck in the first place. Many employers will use the credit scores of job applicants to aid in the hiring process. Reading through resumes and checking references is a time-consuming process so credit scores are used as a shortcut. Applicants with poor credit scores are viewed as less dependable and trustworthy and will have a harder time even being considered for a position when competing against similarly qualified individuals with good credit. They may not even be given a chance for an interview. Additionally, in certain industries where employees have access to money such as banks, a low credit score automatically disqualifies a person from working there.

Car insurance companies are another group that have adopted the use of credit scores to help determine risk. Studies have shown that drivers with low credit scores are more likely to file insurance claims. And since claims cost the insurance companies money, they want to make sure that the people more apt to file them are charged accordingly. For this reason, the vast majority of auto insurance companies factor in your score when drawing up a policy. The lower your score is, the more you will have to pay in insurance premiums.

Credit card companies also take your credit score into account, which is something most people were aware of, but not everyone realizes the extent of it. Since a credit card is similar to a loan in that you are granted a line of credit that you are required to pay back with interest, it makes sense that credit card companies factor your score into how much credit you can get approved for and at what interest rate. What not everybody realizes is that these figures are not fixed. A credit card companies like to include a “universal default” provision in their contracts in which they reserve the right to monitor your credit reports and increase the credit card interest rate if you have late payments or other negative items added to your credit reports, even if they are completely unrelated to the credit card account. Since credit card debt is unsecured and can be dismissed in a bankruptcy, credit card companies work hard to make sure that if your finances get out of control, they are going to collect as much money from you as possible. Any indication that you might be having trouble making payments and they may start working to offset any future losses.

As you can see, a good credit score opens up a world of opportunities and has benefits many people didn’t even realize were there. On the flip side, a bad credit score can be a huge roadblock causing people to have to work much harder in just about every facet of their finances.

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