5 Moments When Neglecting Your Credit Score Is a Bad Idea | GOBankingRates
Your credit score has a huge impact on the net loss or gain of some of life’s biggest financial moments: a good score gives you more options, better terms and bigger savings. Your credit score will follow you throughout your life and affect a variety of situations, but these five times are when your credit score really matters the most.
1. Financing a Car
There are three factors that determine how much financing a car will cost: how much money you put down, the length of the term of the loan and your credit score. On a $10,000, 60-month auto loan, a borrower with a low credit score will pay nearly $4,000 more in interest charges than a borrower with a prime credit score.
If you have a less-than-stellar credit score, shop around for the best car loan rate available — the savings will be well worth the effort. And don’t worry about having multiple inquires on your credit report. Any rate shopping activity 30 days prior to scoring is ignored by FICO’s calculation. Additionally, multiple inquiries older than 30 days using an old FICO scoring formula are considered just one inquiry, as long as they were made within a 14-day period. For credit scores using the new calculation method, this period spans 45 days to ensure rate shopping isn’t penalized.
2. Buying a House
It’s common knowledge that your credit score matters when applying for a mortgage, but just how much your score costs you in the long run is often ignored. The difference between an excellent score and good score can cost you tens of thousands of dollars over the lifetime of a loan, and having a poor score can cost you your dream of homeownership altogether.
According to Informa Research Services*, the average national interest rate on a 30-year fixed rate mortgage for a consumer with a 760 or higher FICO score is 3.547% APR. If you take out a $200,000 mortgage loan at 3.547% APR, your monthly payment would be around $903. If you have a FICO score of 660, your rate could go up to 4.16% APR, which would raise your monthly payment by $70. The number seems negligible until you annualize those costs. The $70 increase adds up to more than $25,000 in additional interest on your home for the life of the mortgage.
3. Starting a Business
If you are a small business owner or have dreams of entrepreneurship, your personal credit is a major influence on the kind of capital you can access. According to Federal Reserve Bank of Atlanta researchers, “the personal credit record of the business’s owner is a good predictor of the repayment of business loans that are less than $100,000.”
Even if a business is set up as a corporation to limit personal liability, credit scores are often tied to the owner’s ability to personally guarantee the business’s debts; an analysis by the Federal Reserve estimated that 40.9 percent of all small business loans and 55.5 percent of small business borrowing is personally guaranteed.
4. Renting an Apartment
Though there are no official credit score requirements to rent an apartment, the higher your score, the better your housing options. A competitive credit score can give you the edge you need to rise above other applicants or take advantage of offers, like low down payment promotions for qualifying applicants.
Rental markets can be competitive, especially in large cities where many owners of multi-unit apartment buildings have a minimum score requirement to rent within the community. According to SFGate.com, at least one San Francisco landlord required applicants to have a minimum credit score of 720 during 2012. If you have a low score and have a hard time getting your rental application approved, you may have better success with a private landlord — your options will be limited but the requirements tend to be less strict.
5. Qualifying for Insurance
Insurance companies have standard practices for setting their rates, weighing various risk factors to calculate the exact rate to charge a customer, including their credit score. But the scores insurance companies use are different than the ones used by banks and financial services companies — these scores are called Insurance Credit Bureau Scores, or Insurance Risk Credit Scores.
Insurance scores consider credit information and previous insurance claim information, which allows insurers to determine how much of a risk someone is to insure. Actuarial studies suggests that someone who pays all of their bills on time, has a good credit history and hasn’t filed any insurance claims is less of a risk and a more profitable customer, according to the Insurance Information Institute. Therefore, a favorable credit score will not only get you a better rate on your insurance premiums, it could be the determining factor on whether you even get approved for coverage.