In my last article, I told you what’s typically on and what’s typically not on your credit report in Back to Basics… After the article was published, a good friend of mine and I were having a conversation, and I offered to help him improve his credit rating. This friend said he would be willing, but for my benefit, meaning if it was going to make me money, and not for his own credit standing. His point of view is that, “cash is king” (see a previous article by the same title from yours truly) and that he has plenty of it. I quickly agreed to both his points and stated, “But Credit is Queen.”
In my experience with credit reports and scores from a cross section of America, I’ve come in contact with many people that don’t owe anyone, and thus, they believe their credit is good. This is not necessarily the case. Not owing anyone, or being debt-free is not the same thing as having good or excellent credit. As a matter of fact, the absence of an established credit history could be just as detrimental as having “bad credit” or a low credit score.
How is this possible? It’s possible because your credit scores are a reflection of your credit history. Think of it as your reputation. If your score indicates you have been deligent about maintaining your credit, then you are considered as having a excellent reputation. If you have had some credit trouble in the past, but you are working your way out of those issues, then you are rebuilding your credit reputation. Your credit history determines your creditworthiness using a complicated algorithm. The end result of this calculation gives you a score. Banking institutions and the like use this number to access their risk. The higher the number, the more likely you are to follow through on your financial obligations. The lower the score, in their estimation, the less likely you are going to pay them as agreed upon. Having a low credit score does not mean that you don’t have a chance of obtaining new credit. It simply means that you may have to search harder, and it certainly means that you are going to pay higher fees and interest rates.
Don’t think your credit score affects you…think again!
I’d like to focus on how your credit score affects you in ways other than obtaining a mortgage or buying a car, etc.
-Car insurance: Yes, car insurance. Your insurance company will take into consideration your credit score when determining the likelihood of risk. An insurance company typically is not a banking institution so of course there are other factors in determining how much your premium, down payment and terms will cost.
-Cell phone: A low credit score, collection or judgment from a cell phone company virtually guarantees that you will pay a higher deposit and possibly be forced to enroll in autopay. If your credit score is good, but you have had trouble with a cellular carrier, autopay is one of the newest requirements to mitigate the company’s risk of default on your contract.
-Cable: Similar to a cell phone company, a cable company also takes a peek at your credit report and employs the same tactics as a phone company. You may be asking yourself if these inquiries into your credit history negatively affect your score. They do not. Inquiries of this kind are considered “soft inquiries” along with those companies that solicit you as a pre-approved customer.
These industries, including utilities and even car rental agencies, attach how responsible you are with your credit score to your willingness and ability to pay for services. Fair or unfair, they do. In my estimation, having little to no credit is a problem. It could cost you hundreds or thousands of dollars. We all want the best deal possible. Establishing good credit helps you get the best deal.
Lastly, come back every Tuesday for my new weekly column, CREDIT SWAGGER. So if you need some swagger, have just a little bit of swagger but want more…stay tuned, come back for more great reads to help you increase your Credit Swagger.