How Credit Impacts You
Perhaps one of the most misunderstood — and frustrating — things about the consumer credit industry is that a consumer’s credit history affects many aspects of their lives that seemingly have nothing to do with credit. What does your credit score affect? Lots of things. Of course, there’s the obvious: Your credit score affects what sort of credit card you can get or if you can take out a loan, because those are credit products. But your credit history can play a role in all sorts of life events and necessities, like finding a job, getting a cellphone, searching for a place to live and taking out insurance policies. We’ll explain a little bit more about what those things have to do with credit, but here’s the bottom line: Bad credit can affect so much more than what’s in your wallet.
Find Out Where You Stand
The first step toward understanding how credit affects your life is to check your credit standing. You can get two of your credit scores for free on Credit.com, with updates every 14 days. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you can take to improve your credit. You’re also entitled to a free annual credit report from each of the major credit reporting agencies — Equifax, Experian and TransUnion — once every 12 months. Checking your own credit reports and scores does not affect your credit score.
Apartments & Rental History
Landlords, property managers and rental agencies typically review potential tenants’ credit reports. They are usually looking for a pattern of missed payments or other negative information on your credit reports that indicate you may not pay your rent. If you have bad credit, the landlord or property manager may require you to pay a larger deposit (within state law, of course) or get a cosigner, or they may reject your rental housing application all together. In addition, each time a potential landlord reviews your credit, it will result in an inquiry on your credit report that can affect your credit scores, so be careful about applying at several places at once. Depending on the credit scoring model, multiple rental inquiries within a short period of time may be counted as one, so you’re not penalized for “shopping around.”
Traditionally, on-time rent payments did not help your credit because they weren’t reported to credit reporting agencies. But there has been an effort to change that. All three credit bureaus will include your rent payments in your credit reports if your landlord reports the information to the bureaus, and some credit scoring models will include that information in your score. While an increasing number of property management companies, rent payment-processing companies and landlords now report positive rental history, rent remains an unreliable way to build credit. If your landlord does not currently report your rent payments, you can ask them to use a rent-reporting service. For example, RentTrack allows you to pay your rent online and reports those rent payments to Experian.
Failing to pay your rent can seriously damage your credit scores, however. If you’re evicted, that will likely show up in a tenant-screening report (a consumer report, different from your credit reports, but often used in the rental application process). And if your landlord sends your missed rent payments to a debt collector, the collection account may show up on your credit report and can remain there for up to seven years plus 180 days from when you first fell behind. That’s not good for your credit scores or your chances of getting future rentals.
Your credit scores commonly influence auto loan rates available to you. If you have an excellent credit score (750 or higher on a 300 to 850 scale), you are likely to qualify for the best loan terms available (sometimes even a 0% APR). But even people with major credit issues can qualify for an auto loan, though the rates tend to be very high. No matter your credit standing, it’s a good idea to take the time to shop around for the best auto loan rates you can find. While inquiries from loan applications can lower your credit scores, many credit scoring models will count multiple auto-loan inquiries within a short period of time as a single inquiry, so consumers aren’t penalized researching their best options.
Cellphone companies may review a version of your credit reports before deciding to grant you a service plan. People with credit issues may be asked to pay a deposit before starting service. There are cell phone services available that do not require a credit check, but you should know that a cell phone-service application may generate a hard inquiry on your credit report and can lower your credit scores.
Banks will not check your credit reports during the checking or savings account application process, and your checking and savings account activity is not reported to the credit bureaus. However, most banks will review your ChexSystems report before granting you a new account. This report is not based on your credit file, but instead includes records of bounced checks or other banking negatives.
It’s also important to know that a bounced check can hurt your credit, because the person or company to whom the check was made out may hire a debt collector to get the money from you — collection accounts appear on credit reports and damage credit scores.
Child Support Enforcement Agencies
Failing to pay child support can hurt your credit. Child support enforcement agencies can report delinquencies to the credit bureaus and, as a result, non-payment can damage credit scores.
When you apply for a new credit card, the issuer will review your credit to see if you qualify for the card and what terms you should receive. The credit qualifications will vary by issuer and card type. Generally, rewards cards and cards with low APRs require the highest credit scores, though there are credit cards for every level of credit, including people with no credit. (Secured credit cards cards are the traditional option for no- or bad-credit applicants.) Credit card companies often review the credit scores of existing customers and in turn may adjust their rates, but an account-review credit check will not hurt your credit. Credit card applications generate hard inquiries on your credit reports and can lower your credit score.
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Employers must get written permission before they can review a version of your credit report. Usually employers review this version of your credit report for major negative records or discrepancies, particularly if your job involves handling money or some sort of security clearance. If an employer decides to take “adverse action” based on the information on the version of your report, they must notify you first and provide you with a copy of the version of your credit report they reviewed. Employers can also check versions of credit reports of existing employees, as long as they previously disclosed that they may take such action. When an employer checks the version of your credit report, it does not negatively affect your credit scores.
Home and auto insurers commonly use consumer credit information — credit-based insurance scores — along with your application data in determining rates and terms (though this is not allowed in some states). After asking for your permission, the insurer will pull your credit data to calculate your “insurance risk score.” The higher your score, the better your insurance rates may be. This credit inquiry will appear on your credit report as a soft inquiry, meaning it would not harm your credit score.
Mortgage lenders usually review your credit scores and your credit reports from the three major credit bureaus as part of the application process. In most cases, a mortgage loan is much larger than an auto or student loan, so the review process is much more detailed. The score you need to qualify for a mortgage varies by lender, loan type and the general housing-credit market, but the higher your credit score, the better your chances of approval and a lower rate. Mortgage applications will appear on your credit reports and can lower your credit score, but most credit scores will allow you to “shop around” and will count multiple inquiries in a short period (generally between about 14 and 45 days) as a single inquiry.
Federal student loans do not require a credit check, but private student loans and federal student loans taken out by parents do. Your student loans affect your credit just like any other loan, but they’re rarely discharged in bankruptcy, so it’s crucial to stay on top of those payments.
Electricity, cable, and other utility companies may check your credit report with your permission when you request services, and people with credit issues could be required to put down a deposit or add a cosigner to set up their accounts. Inquiries from utility applications can affect your credit score.
“It depends on how they utility company makes the inquiry,” Rod Griffin, director of public education for Experian, said. “If it is in response to the initial application for services it would be a hard inquiry. If the request were made for an existing customer, similar to a lender doing a portfolio review, it would be a soft inquiry.”