Attention: Your Credit Score Impacts More Than Just a Loan Rate

It’s common to assume that the reason someone can afford a new car or a nicer home when you can’t is because they make more money than you do. While income certainly is a factor, your credit score has a significant impact on a loan payment amount and other services offered to you. 

Income is not the only factor at play.

Ways Your Low Credit Score Can Cost You

Car insurance

That’s already high enough, right? Tack on some lousy credit, and ouch!  

That’s right, you pay more. A government study found that a lower credit score can mean a driver will file more claims, so insurance companies charge higher premiums.

That free checking account at the bank across the street?

If your score is too low, you can be denied a checking or savings account at a bank/credit union.

That job you wanted?

So you feel that the interview went well and you’re confident you’ll get the job. Well, depending on the state you live in, if the interview was for a banking or financial position, your potential employer may check your credit. 

Although they can’t see your actual score, they can see payment problems and credit usage. If your potential employer has concerns, it could cost you that job opportunity.

The cute apartment with a balcony overlooking the park? 

Yes, you make enough to pay the rent and then some, but your credit score is too low per the complex’s guidelines, and you could be denied.

Bummer! And you so looked forward to walking your puppy in the park after work each night.

0% Credit card promos

These can stay at 0% for up to 21 months. Credit card promotional rates can save you serious money on interest if you are trying to pay down debt. But, these offers are typically reserved for those with higher credit scores.

Lower credit scores look risky and can make lenders feel that you lack the responsibility or ability to repay them.  

Poor credit costs you in the long run, as you pay more for services and can also miss out on options that could make life a bit easier. 

A Simple Comparison To Show the Impact

You and your best friend Tanya work at the same job and make about the same amount of money. Neither of you has kids, and your living expenses are similar.  

The two of you are out and about one weekend and see a car that you both love. You’re ready to trade in your vehicles for that shiny new one.

So you give it a test drive and end up in the finance office (everyone’s favorite spot, right?). To your shock and dismay, you find that although your BFF is over there smiling with the $370 monthly payment she will have, your monthly payment for the exact same loan will be $475.  

Why? That doesn’t make any sense!  

And, you can’t afford $475 a month, so it looks like you can’t have this car while your smiling BFF can. 

Or- you decide you still want the car even though you know you can’t handle that payment. Now, you are overextended, and other bills won’t get paid so that you can pay your car, and you end up in a vicious cycle. Not a good choice, but many out there make this very same mistake.

Why did this happen—what could cause this stark difference in payments?

Yep, you guessed it—your CREDIT SCORE.  

Not your income. Nope, it’s something you created with your financial behavior, and it can impact many aspects of your life.   

The Why

Well, your friend Tanya is one of those people who are always on time, organized, and pays all of her bills on time.  

You, on the other hand, are a bit more free-spirited and will sometimes forego a payment to cover other fun expenses. Not to mention forgetting about a few payments here and there.  

Now, those seemingly harmless missed payments are coming back to bite you. You never thought it would prevent you from getting the car you want, right?

In fact, you don’t even know what your credit score is!  

The finance rep explains that your rate will be 15% based on your credit score. Meanwhile, Tanya is so excited about the 4% rate on her loan.  

You are left to wonder,  is it just because you missed a few payments?   

So What Factors Make Up Your Score Anyway?

There are three credit bureaus that lenders may check for your credit score: Equifax, Experian, and TransUnion. Although the score may vary a bit from bureau to bureau, they take the same factors into consideration:

• Payment history (the more recent the problem, the greater the negative impact)

• Usage of credit (balances on cards compared to limits)

• Length (age) of credit history  (the longer you have had credit, the better)

• Applications for new credit  (credit pulls bring down your score)

• Total credit types (good to have a mixture of credit cards & installment/fixed payment loans like cars or mortgages) 

   

You don’t need immaculate credit and the highest score to get the best loans and offers. Having good (it doesn’t even have to be great) credit helps. 

In fact, according to an article on ValuePenguin, the average credit score of a car buyer is 706. With that type of score, you are generally considered as having A-tier credit. 

When someone has a score of 580 or lower, that is considered subprime and will have much higher rates—usually in the double digits. Ouch!

In fact, many places won’t lend to you with that score at all.

Don’t Fret-You Can Improve Your Score 

If you look at what makes up a score, payment history and credit usage are the two most significant factors. Focus on those two areas for the greatest impact. Yes, all areas matter—but those two hit the hardest.  

Pay all of your bills on time- all of them.  

Don’t max out your credit cards.  

What if you don’t have a loan to build up your score/reestablish your credit? Well, there’s a solution for that, too—a secured loan. It allows you to use your money as collateral to make monthly payments and improve your score.   

Credit karma has a great loan payment calculator that you can use to get estimated payments based on your credit score and loan rate. You can also view your credit report for free to keep an eye on your progress.

Always look at your score before applying for a loan, so have an idea of the type of rate you may be offered. 

Hopefully, knowing how your credit score affects so many aspects of your life motivates you to take action and begin rebuilding it. Your loan information is typically reported monthly by creditors to all three bureaus.

You need to be patient, as it takes some time to get the score moving back up in the right direction.  

The great news is that scores aren’t permanent—they are always changing, which can be a good thing for you! You’ve got this!