In the financial world, we all have a number that’s supposed to sum up our fiscal credibility quickly. Credit scores can range from 300–850, and while the national average is just over 700 per CNBC; plenty of individuals suffer the wrath from low credit scores.
Here’s why you should care about your credit score:
Negotiating Power with Creditors
Many people don’t realize it, but few things are concrete in the financial world. Nearly everything is open to negotiation. But don’t expect any financial institution to tell you that; it’s up to you to ask. Want to restructure your mortgage or ask for a no-interest grace period on credit card balance? You can!
However, you’ll need a good credit score to have any leverage with creditors. If you’re not sure what a good credit score is, smart budgeting apps like Clarity Money show you the five tiers of scores ranging from bad to excellent.
Low Credit Scores Will Cost You More Money
If you plan on borrowing money for anything in your life, having a low credit score will cost you money in the form of higher interest rates and less favorable loan terms. This is because lenders will deem you as high risk and charge you more to compensate for it.
The higher the loan you apply for, the more you’ll pay in interest. Likewise, the worse your credit score is the higher your credit card APR. Per wallethub, the current highest interest rate credit card carries a 36 percent interest rate. By comparison, the current average APR is around 16 percent.
Getting a Cell Phone Contract
In our digital economy, we take our seamless communication for granted. But people with bad credit often have to jump through more hoops to get a decent cell phone plan. Bad credit may require you to make upfront payments on a cell phone or get a prepaid cell phone with a month-to-month plan, which is more expensive.
Starting a Business
Want to put your blood, sweat and tears into something that benefits your end game? You’re not alone. According to the Small Business Administration (SBA), there are nearly 28 million small businesses in the U.S. Most of those operations wouldn’t have been possible without business loans. So, unless you want to bootstrap your dream, you better make sure your credit is in check.
Securing Good Employment
As the gig economy roars and employer and employee loyalty diminish, employment and credit are becoming less entwined. However, high-profile positions—like corporate and government—are still difficult to obtain with a poor credit score.
Easier Time Renting an Apartment
Buying a home isn’t the clear-cut great investment it used to be. This is leading more people to forego the mortgage in favor of renting. But if you have bad credit, you’ll find that renting an apartment can be quite the chore. Landlords always run background and credit checks before approving someone for a place. A low credit score might not completely disqualify you, but you’ll likely have to cough up a higher security deposit to do so.
Why You Shouldn’t Care About Your Credit Score So Much
Of course, plenty of financial experts will argue that credit scores aren’t all that important. For instance, Dave Ramsey writes on his blog that your credit score “is not an indicator of winning financially.” It just means someone is good at borrowing money and paying it back.
Ramsey even outlines how people can get a mortgage without a credit score through a process called “manual underwriting.” To qualify for this, you’ll need to:
- Put at least 20 percent down on your home.
- Choose a 15-year, fixed-rate mortgage.
- Have a strong employment history and personal income.
- Show 4-6 recurring expenses over the last 18–24 months, things like electric bills, water bills, cell phones, and so on.
Sounds like being a responsible adult, right? Of course, if your credit history shows late or missing payments, you may encounter resistance.
All this isn’t to say that you should stop focusing on your credit score. A credit score is a valuable financial tool that makes many things in life easier. Regularly monitor your credit score, but don’t obsess about it—and certainly don’t base your financial decisions on it.
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