It is important to understand the responsibility that comes with borrowing money. Of course, the main responsibility of every borrower is to pay back the money they owe. And, because there are far reaching affects, borrowers must also try to manage other aspects of credit that will be reflected in their credit history and credit score. To ensure a healthy credit score, borrowers must limit the amount of debt they have at one time, make payments on schedule, and make wise choices about the types of purchases made with credit.
Lenders look at your credit score and credit report to determine how much and on what terms they will lend. There are three national credit bureaus: Equifax, Experian and TransUnion that collect and report information about borrower’s credit history. They use that information to assign a numerical grade called a credit score. The credit score is based on a borrower’s payment history, outstanding balances, the length of credit history, and the types of credit used. Lenders use the credit score and report to determine if a borrower is likely to pay back their debts.
If you have a favorable credit report and credit score, lenders are more likely to extend you credit. And, they are more likely to give you better terms such as a lower interest rate, larger loan amount and access to more available credit. That is why it is so important to pay your bills on time and keep your outstanding balances low. When lenders review your report and score, they are more likely to conclude that you will continue to be a responsible borrower.
If your credit report and credit score reflect that you have not been a responsible borrower in the past, lenders will be less likely to extend you credit. If they do extend credit, they will want to charge you higher interest rates because of their concern that you may not act responsibly to pay back the loan. While lenders may still give you a loan, they are probably going to be more cautious about the amount of loan or line of credit they are willing to give you. This can often put the kibosh on a borrower’s ability to buy the home they really want, or any home at all. It will also affect a borrower’s ability to get other types of credit such as credit cards or in-store credit for purchases of furniture or other retail goods.
In fact, credit scores and credit history affect a lot more than a borrower’s ability to get a mortgage loan and the terms of the loan. Credit scores can affect you when you purchase a car, purchase car insurance, purchase property insurance, rent an apartment, and apply for a job.
That’s right. There you are sitting in the car dealership, ready to sign on the dotted line for reliable transportation. Your next step is the financial department so you can get the loan you need. The finance department runs your credit report and they don’t like what they see. You’ve purchased cars in the past and haven’t made your payments on time, or your car was repossessed. They just don’t want to give the loan for the new car and your stuck driving that old un-reliable jalopy for another few months or a year until you can improve your credit. Or, their happy to loan you the money for the car, but the interest rate is a lot higher than you expected or want to afford.
Even car insurance companies often use credit scores as part of their criteria to set auto insurance rates. Wondering why? Well, insurance companies have seen a correlation between low credit scores and the likelihood that an insured person will file a claim. So, here again, keeping your credit report in good order may make the difference between getting auto insurance, getting insurance at a reasonable rate or paying a small fortune.
Like car insurance, property insurers often look at credit scores to set rates. Here again, you might save quite a bit of money on your homeowners insurance by keeping your financial house in order.
And you might be surprised to know that potential landlords often run credit reports before they will rent you an apartment or other property. A credit report will show them if you have a history of paying late or if you have been evicted from a property in the past. If the landlord sees that you have been irresponsible, your past behavior may work against you when a landlord is evaluating you as a tenant.
Many employers also check the credit history of their applicants. This is especially true if the position you are seeking requires security clearance, insurance bond, or if you will be working with financial information or money. Many employer background checks include a review of credit history. Employers want to hire people who have a history of acting responsibly because it is a good indicator of how an employee will behave during the performance of their job.
You probably receive credit card offers in the mail sometimes. Even these offers are affected by your credit history. A high credit score can qualify you for lower rate offers, while a low credit score will limit the amount of credit the company will offer and they will offer you a higher interest rate to boot.
Clearly, mortgage loans are no exception. Your credit score will affect whether you are approved for a mortgage and how much of a mortgage loan the lender will give you. If your credit score is low, you may have to come up with a larger down payment. Even then, the lender may decline to make the loan or they may increase the interest rate.
As you can see, credit history and scores have wide reaching affects for your financial and day-to-day life. Managing credit in a responsible way can save you headaches and very often a good deal of money.