You may have heard or read the advice that you should work to maintain your credit if you have good credit, and to improve your credit If you have bad credit. But you may wonder just how much your credit actually affects your life. If you are attempting to make changes in your life, your credit score could have a significant effect on your day-to-day activities. But if you never use or need credit, your credit score may have little or no impact.
Rent and Mortgages
Your credit score may have a profound effect on whether or not you are able to rent an apartment or buy a house. Landlords routinely run credit checks on prospective tenants. Banks and mortgage lenders also perform extensive credit checks before approving prospective home buyers for mortgages. If you have bad credit, your prospects for purchasing or renting an apartment or house are grim. You’ll have to work hard to find a landlord or lender willing to overlook your poor credit score.
One of the ironies of life is that if you have bad credit, you may have a hard time finding a job. In some industries, running credit checks seems prudent – such as banking or even retail. Someone with credit problems might be more prone to financial misconduct. But employers also run credit checks in totally unrelated industries, using the premise that good credit is a sign of good character. Of course, if you’ve been unemployed for months or years, your credit may be damaged due to lack of income, which is one reason why California, Connecticut, Hawaii, Illinois, Maryland, Nevada, Oregon, Vermont and Washington forbid employers from running credit checks as a condition of employment. In Nevada, employers who illegally run credit checks on prospective employees may be forced to hire them anyway.
Your electricity. Your heat. Your cell phone – all utilities that often conduct credit checks for new customers. You may be charged higher electricity and heating rates if your credit is poor. If you attempt to obtain a cell phone with bad credit, you may be forced to put down a large deposit or settle for a prepaid phone.
You may be surprised to learn that home, rental and car insurance companies also check your credit. If your credit is good, you are offered lower rates. If your credit is bad, you may be denied coverage or obliged to pay much higher rates, even if you have never filed a claim for insurance policies you have held in the past.
Private Student Loans
Federal student loans do not require or use credit checks. But private student lenders almost always run credit checks on prospective borrowers. If your credit is damaged or poor, you will need a credit-worthy co-signer to be approved for private student loans.
It goes without saying that credit card companies run credit checks. But so-called subprime credit card companies focus on customers with damaged or poor credit. Some credit card companies work with their customers to help them rebuild their credit; others simply soak their customers with high interest rates and stiff fees.
A secured credit card can help rebuild damaged credit. Secured credit cards work just like regular credit cards, and can help rebuild your credit by reporting a good payment record to the three major credit reporting bureaus: Experian, Equifax and TransUnion. Beware of prepaid credit cards which almost never improve your credit score.
Some banks run regular credit checks on new prospective account holders. Other banks check out potential customers through ChexSystems, a proprietary credit reporting agency that focuses specifically on the banking industry. If you have a history of overdrafts and bounced checks, you will likely have trouble opening a bank account.
Americans love their cars, and why not? Cars represent the freedom to go where you want, when you want. And in your own car, you can play the music you like as loud as you want. But if you have bad credit, you may find yourself depending on public transportation or walking to get around. Auto lenders almost always demand credit checks. So called “buy here, finance here” dealers advertise that “everyone drives, “ but the main driving forces at such establishments are high interest rates and overpriced cars, many of which are sold, repossessed and resold several times to desperate buyers who cannot obtain approvals for auto loans elsewhere.
If You Never Use or Need Credit
The above list may give you the impression that your credit score affects nearly every aspect of your life. For many people, this is the case. But if you never move, never need to look for a job and choose to make purchases only with cash, you can get by without dealing with credit. For everyone else, obtaining and maintaining good credit is one of the most important aspects of good financial health and a satisfying life.
Audrey Henderson is a Chicagoland-based writer and researcher. She holds advanced degrees in sociology and law from Northwestern University. Her writing specialties are sustainable development in the built environment, policy related to arts and popular culture, socially and ecologically responsible travel, civic tech and personal finance.