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5 little-known ways credit scores impact you

 
By Eva Norlyk Smith, Ph.D.
January 9, 2011

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Most people know it’s important to have a good credit score to qualify for a mortgage, car loan or credit card. But do you know how many other ways credit scores affect your life? And how dearly it can cost you to have bad credit?

Here are some of the lesser-known ways in which credit scores affect you:

1. Mortgage, credit card and other loan costs
Credit scores determine whether you qualify for a loan or credit card. However, they are also a major factor in determining interest rates and other loan terms. Lower scores indicates higher risk to lenders, and they will seek to protect themselves by charging higher interest rates and offering more strenuous lending terms. If you have a good score, lenders will see you as lower risk, and adjust interest rates accordingly.
It used to be that consumers had little idea of whether they were being offered the best loan terms, but as of Jan. 1, 2011, lenders will be required to give consumers written alerts about how their credit scores might be impacting the rates and terms they are offered. The intent is to give consumers the ability to make more informed choices about credit; and, if relevant, possibly defer the loan until they have taken steps to improve their credit score.

2. Car and home insurance premiums
Most insurers take applicants’ credit scores into account when determining the cost of the car insurance policy offered. In some cases, this applies to the cost of home insurance as well.

Wonder what a person’s car insurance has to do with his or her credit score? Well, insurers see financial responsibility as a significant indicator of how responsible drivers will be on the road. According to the Insurance Information Institute, a trade association for insurers, drivers with bad credit scores have 40 percent more claims than those with good credit scores. As a consequence, consumers with poor credit may end up paying from 20 percent to 50 percent more in auto insurance than those who have good credit, according to Bankrate.com.

Insurance companies are increasingly taking credit scores into account when determining rates for homeowners policies. Again, the rationale is that people who manage their personal finances well will also be more likely to manage their homes responsibly.

3. Rental housing availability
Prospective landlords often do a credit check before approving prospective renters. In some cases, landlords might refuse to take people who have bad credit, since they are considered a higher risk for defaulting on rent payments. In other cases, people who have poor credit may be required to pay a higher security deposit if the landlord deems the credit score too low.

4. Cell phones and other monthly services When signing up for services that require regular monthly payments, such as a cell phone provider or satellite TV, service providers typically run a credit check. Most providers will require a minimum score to sign up new applicants for their service.

5. Finding employment
More and more employers — especially in the government sector or in jobs that deal with finance — require a credit check for new employees. Again, there’s a perceived link between personal responsibility and a person’s credit score. In addition, some employers are worried that low-score employees pose a greater risk of fraud or embezzlement. Unfortunately, for people who are unemployed, this can easily become a catch-22: If their credit score dips because of the financial straits caused by unemployment, they may have increasing trouble finding a new job, because their credit score is low.

In short, regardless of whether you’re planning to apply for a mortgage or other type of loan, credit scores impact your financial life, for better or worse. To make sure you know all the ways to improve your credit score, take this simple credit score quiz.


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