Beating Broke

Personal Finance from the Broke Perspective

Poor Credit Score: How are you Really Affected?

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This post in Collaboration with Debbie Fletcher

‘I’m not a number, I’m a free man’ so goes the classic line of the iconic 1960s BBC television series The Prisoner. Yet, in many respects that’s not true. These days you are defined – at least financially – by a number and it’s your credit score (especially if it’s a poor credit score).

This figure – barely understood by most people outside of the world of finance – can have a massive impact on your life, maybe even without you knowing what it is.

It’s important not to dismiss this as just another bit of jargon (there’s plenty of it in the world of finance after all). If you need convincing, they why not consider the issues that you might face as a result of a poor credit score?

Access to money

The most obvious issue facing you if you have a poor credit score comes with your ability to be able to afford big ticket purchases. Whether it’s a house, a car, a holiday or an emergency repair – life has a bit of throwing up key purchases that cannot be paid for upfront.

We are now a nation of borrowers as a result – but our ability to borrow can be severely hampered by a bad credit score.

The ‘score’ itself refers to a calculation given by a credit scoring agency (there are three in the UK and three in the US). It’s effectively a measure of your borrowing ability and you’ll be marked down for missed payments or debts that you have been unable to pay off.

The number will determine whether a lender will give you money in the first place. They want assurance that you are likely to pay them back and this is the way in which they’ll get their assurance. It might also dictate how much you can borrow and the interest rate you will be charged.

So, put simply, a bad credit rating will mean that you can get less money, will be charged more for the privilege of borrowing that money or even that you are just turned down in the first place. That means that house, car, holiday or home repair could be an awful lot more of a problem for you.

Jobs

It isn’t all about the money that you borrow, however. Your score could also impact upon your ability to earn too. Employers are able to run a credit check on the people who apply to them for a job. This check is about ensuring the candidate has a sound record and can be trusted – but you could feel like this is a crude way to do this, as you might not have chance to offer any explanation by way of context.

Does one missed loan payment five years ago or a dispute with an old mobile phone contract deserve to define you in the eyes of employers? Whether you think this is fair or not, it might well be the case.

Emotional

Then, of course, there’s the emotional aspect to all of this. A bad credit score might hang over you. There are steps you can take to improve your credit rating, but this might well take time and mean that big life choices have to be put on hold for a while. Do you really want to be forced to delay moving into your first home with a partner for a few years while you sort out your credit rating?

During those years you might feel under a great deal of stress and strain and some people might well feel embarrassed about what they consider to be a ‘black mark’ against them. We might be a nation of borrowers, but we’re not a nation that is terribly good at talking about borrowing and money. Indeed, our personal finances are still seen as something of a taboo by many people and that can cause people to bottle up their concerns or bury their head in the sand when they encounter trouble.

A poor credit score can, therefore, stop you buying the things you need, harm your chances of getting a good job and impact upon your mental health. When you put it like that, the importance of a good credit score becomes pretty clear.

5 Ways a Better Credit Score Leads to Better Finances

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BookkeepingEverybody knows that you want to have the best credit score you can.  Why?  Because the better your credit score, the better the rates you can get on your loans, of course!  But, did you know that there are other reasons to try and improve your credit score?  In fact, here’s five ways that having a better credit score can lead to better finances.

  1. More money.  This is the obvious one.  A better credit score leads to better rates on loans (see above), and better rates lead to less interest paid over the life of the loan.  And less interest paid leads to…  (wait for it) a  better bank balance!
  2. Better rentals.  It’s a sad fact that many landlords are doing credit checks on prospective tenants these days.  They’ve got assets to protect, so it’s a smart move for them, but the fact that there are so many landlords out there getting burned that it’s become necessary is sad.  But, having a good credit score can help make sure you don’t get turned down for that great apartment down by the beach!
  3. Quicker payoff.  This one goes really closely with the first point.  With those lower rates, and lessened interest also comes the ability to pay the loan off quicker.  And, of course, a quicker payoff means a much better financial situation.  Especially if you avoid any new loans afterward.
  4. Any loan you like.  If you must loan money, at least do it smartly.  With the current state of affairs, you can’t just walk in and get a loan that has a pulse as it’s only requirement.  In fact, many banks and credit unions are cutting way back on their sub-prime lending for anything.  (P.S. the term “sub-prime” doesn’t just apply to mortgage loans) If you have poor credit, it’s much more likely, today, that you’ll get turned down for a loan altogether.  Better credit means that if you really need a loan, you probably can have one.
  5. Less fees.  We all hate fees.  Well, all of us except the financial institutions.  A growing number of them are making a growing amount of their revenues from fees.  And many have moved to an account structure that is based off of risk.  And risk is determined by credit score.  A lower credit score could mean an account with higher fees, or with monthly fees that some accounts might not have, while a higher credit score might qualify you for a different account without those fees.

So, you see, having a good credit score can really send your finances in the right direction.  And, having a bad credit score can really send them into the dumps in a hurry too!  Unless you’re very dedicated to the extreme frugaler lifestyle, and never plan on really using money, it still pays to have a good credit score.  It doesn’t take much to build it, and you might be glad you did someday.

photo credit: o5com

VantageScore: A New Way to Figure Credit Scores

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Dave Ramsey doesn’t have one.  I didn’t have one when I first graduated from college.

What am I talking about?  A credit score.

Our reasons are different–Dave Ramsey shuns credit, and as a recent college graduate, I hadn’t yet opened a credit card account nor bought a car with a car loan–but we were still in the same situation.  So, how did a recent college graduate making less than $35,000 a year get lumped in the same high risk category with Dave Ramsey?  Simple.  FICO didn’t have a score for either one of us because we hadn’t used credit in the last 6 months.

Life Without a FICO Score

Of course, if you’re Dave Ramsey earning a gazillion dollars a year (just joking, sort of), you don’t really need a credit score.  You can pretty much buy what you need with cash.

However, if you’re like the majority of Americans, you need a credit score to do the most basic of things like rent an apartment or qualify for a car or home loan.  (Okay, if you follow Ramsey’s advice to stay out of debt, you don’t need to qualify for a car loan, but you still likely need a home loan.  Besides, many landlords routinely ask to check your credit before agreeing to allow you to rent their apartments.)

For many, then, there is a problem.  How can you shun credit cards as Ramsey advocates and yet still have a credit score?  For years, the answer used to be–you can’t.

However, CNN Money reports that hope might be on the way in the form of a VantageScore.

What Is a VantageScore?

A typical FICO credit score simply looks at the last 6 months of your credit history.

VantageScore, which was created by the three credit bureaus (Experian, Equifax and TransUnion) and unveiled in 2006, instead looks at 24 months of payment activity including payments that don’t require credit cards such as rent or house payments and utility payments.

How Many People Could Benefit from VantageScore

According to CNN Money, nearly 64 million Americans don’t have enough credit history or activity to generate a FICO score.  Of that group, 10 million have excellent credit, and another 20 million have good credit.

Currently, many banks and other lending institutions are missing out on those consumers because they essentially have no FICO score.  The VantageScore would show that these consumers are attractive to lenders because they are responsible with their money.

When Will VantageScore Become Mainstream?

For people without credit to benefit, VantageScore must become more mainstream.  Currently, almost all lending institutions rely on the industry standard, the FICO score.

Until VantageScore becomes mainstream, if you are one who shuns credit, you may be faced with a difficult decision–either use credit sparingly every month and pay it off immediately, or save enough money to pay for everything you need in cash.  (This, of course, is Dave Ramsey’s preferred method.)

Do you use credit just to keep a high credit score, or, like Dave Ramsey, do you shun credit?  If you shun credit, have you had problems with not having a FICO score?