Contrary to popular belief, having bad credit is sometimes as detrimental as no credit. If you’ve resorted to a life of debt-freedom to keep your finances on track, kudos to you for being responsible. However, you may find yourself in situations where ignoring your credit profile or not having credit causes major problems.
Read on to take a closer look at little-known ways your credit score can affect your life:
1. Credit Cards and Loan Products
If you’re not interested in credit cards or loan products, you can skip this section. Otherwise, you should understand the implications that your credit score has for credit card and loan product approvals and interest rates.
When evaluating credit card or loan applications, creditors want to know if the applicant has sufficient income to make timely payments each month and if there’s a likelihood of default. Consequently, you’ll be asked to provide information about your income sources, and the creditor will analyze your credit history.
Based on your credit score, the lender will approve or deny your application. If your score is stellar, you should receive a fairly competitive rate. But if your credit score is in the trenches, they may give you a pass, but you can expect to pay more in interest to minimize the risk of default that you pose to the lender.
Unless you’re planning to pay cash for a new home, you’ll need to take out a mortgage. And all mortgage lenders have minimum credit score requirements, which could make qualifying for a loan a bit challenging if you have a minimal credit history or poor credit. If you’re lucky enough to find a lender that’ll work with you, they may ask that you make a larger down payment to offset your credit challenges.
Many landlords check credit when evaluating applicants from potential tenants. While they may not have minimum credit score requirements to get approved, applicants with past credit issues may be asked to make a substantially larger deposit to secure a rental unit or home.
When you move into a new home, condo, or apartment, you’ll need to activate utilities. But did you know that these providers may check your credit before turning on your lights, water, cable or phone?
If your credit score is low, you probably won’t be denied for services. However, you should expect to pay a steep deposit to activate services. Or you can solicit a co-signer with excellent credit to avoid having to pay.
Once services are activated, be sure to make timely payments each month. Otherwise, you’ll face disconnection fees and the service provider could turn the account over to a collection agency. And if the balance remains unpaid, there’s a chance the debt collector will report the unpaid balance to the credit bureaus, which could tank your credit score by 100 points or more.
4. Cell Phones
The days of low-cost cell phones are long gone. With the string of recent technological advancements, most cell phones have more capabilities than ever and cost several hundred dollars. And providers make it easy to enjoy the latest gadgets without having to fork over a huge wad of cash.
But here’s the catch: to qualify for in-house financing on your new device, you’ll need to undergo a credit check. And if your credit score is in the trenches, you have the option to choose a more cost-efficient phone that you can pay for out of pocket or make a large deposit to get the phone you want.
No funds to put more down and not interested in cheaper alternatives? Consider joining a family plan to bypass the credit screening. Or you can get a cosigner with good credit to help you out. Keep in mind that the primary account holder or cosigner will be on the hook if you fail to make your payments for the phone and monthly service.
Seeking employment in the financial sector? Depending on the employer, a credit screening may be a part of the background check if you make it to the final round of candidates. While the prospective employer won’t be able to view your score, they can take a peek at your credit history to determine if any information in your credit report is a cause for concern.
While the credit pull for employment screenings won’t impact your credit score since it’s considered a soft inquiry, you could be turned down for a job you’re highly qualified for.
If you’re worried about losing a job opportunity due to your credit history, be proactive by writing a letter to the prospective employer to plead your case. Explain the circumstances that led to issues with your credit rating, and communicate that you’ve turned a new leaf and are now back on track financially.
Quick note: to deal with the influx of applicants, companies in other industries have begun using credit screenings to par down their list of qualified candidates for select positions. So, it’s a good idea to reach out to the human resource department of the employer you’re applying with to inquire about the components of their background check before moving forward.
6. Auto Insurance Premiums
Confused about the correlation between auto insurance premiums and credit ratings? Well, past studies have shown that policyholders with poor credit pose an elevated risk to insurance providers as they have a higher probability of filing a claim.
To hedge against this risk, many auto insurance providers have cracked down on extending policies to applicants with subpar credit. And for those that they are willing to take a chance on, they are offered higher rates to compensate for the high level of risk.
Quick note: you may also experience the same issue with homeowners and renters insurance providers if they run credit checks during the application process.
7. Rental Cars
When you rent a car, the rental car company requires you to put a credit card on file for the duration of the reservation. Your card will be charged the cost of the rental and a deposit between $200 and $300 in most instances.
But what if you’ve adopted a debt-free lifestyle and only use debit cards? Or maybe you don’t have a credit card because your credit score is too low to get approved for one? Some rental car companies accept debit cards to secure reservations, but they’ll require additional documentation and a credit screening.
Unfortunately, the credit screenings result in hard inquiries that will decrease your score between two and five points and linger on your credit report for 24 months. There’s no guarantee that you’ll be able to rent a car if your credit profile doesn’t pass the screening. And even if you do, you’ll be subject to a higher deposit than if you’d used a credit card to guarantee the reservation.
The Bottom Line
Since credit can impact many areas of your life, it’s important to take the proper actions to ensure that the data in your credit report is accurate. Furthermore, you want to work diligently to improve your credit score.
But if you don’t plan to use credit, keep in mind that there are drawbacks to ditching credit in favor of a cash-only lifestyle. So, you want to be prepared for those situations that will require credit screenings and could be problematic. This could mean writing a letter to plead your case or having an ample amount of cash on hand to make the required deposit.