Why Credit Matters

If you care about your hard-earned money, you should care about your credit rating and credit score.

When I first left the nest, I paid my bills on time and knew that was doing… something for me. Bankers and credit agencies cared what was happening with my score, but not me. Nowadays, I’m not a helicopter parent to my credit score, but I have a much better fundamental understanding of what impacts and is impacted by credit, and why it’s important to have a relatively good score.

A credit score just tells a company how likely you are to pay your bills. Companies won’t be very keen on giving you a loan if you will never pay it back. Credit scores are one way for them to vet your payment history and provide you with a better (or worse) offer because of it. Here’s why it matters:

Employers Check Credit Before Hiring!

Credit can make the difference between getting your dream job or flipping fries (a crude cliché, but you get my point). More than half of employers run credit checks before offering a job to a new hire. You might be the perfect person for the job, but if your credit is in the toilet you could be automatically screened out without getting a chance to prove your worth. Making sure your credit worthiness is adequate enough for the job is an easy way to keep yourself in the running.

Note: Any employer who chooses to pass on you for this reason is legally required to disclose it in the US.

Financing Rates Are Much Better with a Higher Credit Score.

A home loan that might cost 3-4% today with good credit may cost 7-8% or more with poor credit. Having a 3% interest rate on a $200,000 home loan versus 6% over a standard 30-year mortgage is a savings of $128,121.50! For some of you, this may be a wake up call – credit matters. It can save you a LOT of money to pay attention to what’s going on with your credit. A car loan will also be much higher to secure with poor credit.

Securing the Loan Itself Becomes Easier with Better Credit.

When you have a higher credit score, your loan options grow exponentially. Having a larger pool of options to will allow you to find the best rate. If your score is poor, it can be difficult to find anyone who will want to work with you, even for a higher interest rate! This is also similar to apartment applications – you can easily be turned down for a great apartment on the east side (or whichever side is the nice side of your town) with lackluster credit.

Higher Credit Limits

I’m not a fan of credit cards, though they do serve their purpose and can help build credit! So, there’s some upside when used responsibly. It’s better to build a safety net using other means, but having a higher credit limit can provide some peace of mind in case of unexpected expenses.

Auto & Home Insurance Costs Strongly Influenced by Credit

This one should explain itself, but it boils down to this: worse credit = more expensive auto and home insurance premiums and deductibles. While there are certainly other factors at play (auto insurance calculations rival credit scores in terms of confusion), credit plays an enormous factor in how much you pay for auto insurance. Similarly, home insurance is also calculated using credit to decide how much you’ll be charged.

Utility Companies

Your power, gas, water, electric company isn’t likely to shut you down based on your credit score, but you could be forced to pay a deposit in order to start service. A minor inconvenience, but still – this could have been avoided with a better credit standing.

Cell Phone Carriers

Cell phones have become so expensive that many of the cell phone companies perform check credit worthiness for new customers. This can impact the deposit amount required to lease or subsidize a new phone, or can prevent you from signing up with the carrier at all, potentially forcing you to go with a pay-in-advance carrier instead.

Convinced Yet?

Your score matters. If it’s in bad shape, invest some time to improve it. I don’t do much with my rating/score, but I do keep tabs on it once or twice a  year to make sure I’m still in an acceptable standing. The financial implications are clear across the board – having a better score will help you save money and make doing business with other companies much easier.

Check out the next article in this week’s series on credit on how to improve your credit rating, or skip ahead to learn how to protect your credit.

– Sam


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