Credit Repair

How Does Your Credit Score Affect Your Lifestyle?

In America, credit is king. Whether you want to purchase a new home, lease a car or hack your way to Hawaii on credit card rewards, if your credit score is lacking, your lifestyle goals can seriously suffer. While average U.S. credit scores recently reached an all-time high, a study from CompareCards, a LendingTree company, found that nearly 4 in 10 Americans don’t understand how their score is calculated. That’s a worrying statistic considering just how much your credit score can affect nearly every aspect of your life.

  • Scores between 300 and 599 are considered poor
  • Scores between 600 and 659 are considered fair
  • Scores between 660 and 719 are considered good
  • Scores between 720 and 779 are considered very good
  • Scores above 780 are considered excellent

A credit score in the good-to-excellent range (660 and above) can come with an array of lifestyle benefits, from low interest rates to rewards like cashback credit cards. On the other hand, a score of fair or poor (300-659) can make the following things extremely difficult, and often significantly more expensive.

Getting a mortgage 

Unless you have a few hundred thousand dollars hanging out in the bank, you will likely need to take out a mortgage loan to purchase a home. When banks or other lenders issue mortgage loans, they put down the full cost of the property upfront and set up a monthly payment plan that allows the buyer to pay them back over a set period of time, usually 10 to 30 years.

Mortgage lenders always look at a borrower’s credit score when deciding whether to lend to someone and to determine what a qualified borrower’s interest rate should be.

According to the Consumer Financial Protection Bureau (CFPB), borrowers with credit scores in the mid-700s or above typically qualify for the lowest interest rates.

If your credit score is less than 600, it can be tough to find a lender willing to give you a mortgage. In the eyes of the lender, the lower a person’s credit score, the more likely they are to default on their loan, and lenders want borrowers who will make their monthly payments without issue. While there are government programs that can help people with poor credit scores buy a house, it is much easier — and ultimately much cheaper — to get a home loan when your credit is good.

Borrowers with good credit scores are eligible for lower interest rates, which can translate to thousands of dollars saved over a loan’s lifetime. For example, let’s say two people, Jane and John, each buy identical houses for $100,000, and opt for 30-year fixed-rate mortgages. Jane is given an interest rate of 4.5%, which makes her monthly payment $506.69. But John has shoddy credit, so his lender gives him an interest rate of 5%, which makes his monthly payment $536.82. Sure, $30 extra a month might not seem like much, but three decades down the line, John will have paid over $10,000 more than Jane for the same house.

Securing a home equity loan or a home equity line of credit (HELOC)

If you already own your home and need money for a renovation, to fund education or medical costs or for another reason, you may be able to take out a loan against the current value of your house, minus what you still owe on it.

A home equity loan or home equity line of credit (HELOC) allows homeowners to use their home’s equity, the amount of the mortgage they’ve paid down, to access cash. Often called a “second mortgage,” a home equity loan provides homeowners with a lump sum of money. Meanwhile, a HELOC works somewhat like a credit card, providing borrowers a line of credit they can tap into and pay back as needed.

Unlike a traditional mortgage or loan, which typically require the borrower to have fair to excellent credit to be approved, it is possible for homeowners with bad credit to take out a home equity loan or HELOC; that’s because they are using a large, valuable asset (their home) as collateral. However, many lenders will only approve loans to people with a minimum credit score of 620. Borrowers who are approved at or just above that cutoff will pay significantly more in interest and annual percentage rate (APR) than borrowers with better credit scores.

Renting an apartment

Even if you’re not in a position to buy a house, having bad credit can still affect your ability to keep a roof over your head, making renting more difficult and potentially more expensive.

In order to make sure potential tenants are trustworthy and able to make rent, most landlords run both background and credit checks on rental applicants. If a credit check shows that a potential renter has a poor credit score or a history of missing utility or rental payments, the landlord has the right to either deny their application, require a co-signer or ask for a larger down payment or monthly rent as collateral.

For example, a landlord who usually requires one month’s rent as a down payment may require a renter with bad credit to put down two months’ rent instead, as a kind of insurance policy against a missed payment. This can make things hard for renters with bad credit and little-or-no savings; they may be able to afford the monthly rent on the apartment but cannot swing the large upfront payment. Alternately, a renter with good credit will have significantly more choices when looking to rent, and may even be able to negotiate incentives, like reduced rent or a lower down payment, with landlords eager to rent to someone with a high credit score.

Getting a car loan or lease 

Buying or leasing a car when you have bad credit can be particularly perilous. Unfortunately, the auto industry is rife with predatory lenders who prey on people with poor or subprime credit, offering them loans with sky-high interest rates, unnecessary fees and less-than-ideal terms because they know their options are limited.

Reputable auto lenders prefer to lend to borrowers with credit scores of 760 or above. The higher your credit score, the better deal you’ll be offered on interest on a car loan, or monthly payments with a lease. Borrowers with lower credit scores can save themselves a lot of money in the long term by opting for a shorter loan term. While this means higher monthly payments, it could also mean thousands of dollars in savings over the course of the loan.

For example, let’s say you take out a $20,000 loan with a 4.5% interest rate. If you opt for a 72-month loan term, your monthly payment will be $317, but you’ll end up paying $2,858.56 just in interest over the course of the loan. If you instead choose a 48-month loan term, you’ll be paying more at $456 every month, but you’ll shave almost $1,000 off your total interest payments over the life of the loan.

Accessing credit and credit card rewards 

When used properly, credit cards can give savvy consumers a huge advantage. There are credit cards with cash back or travel rewards, such as flights, hotel rooms and shopping perks. You can also find cards with signup bonuses just for becoming a cardholder and cards with high credit limits and no-interest introductory rates that allow cardmembers the chance to buy big-ticket items and pay them off over time at no additional cost.

Unfortunately, cards that offer serious perks require seriously good credit scores. When you have bad credit, options for getting new credit cards are limited. And even if you are approved, you’ll find your credit limit much lower and your APR much higher than it would be if you had a better credit score. People with scores on the very low side may have to resort to getting a secured credit card, which requires the cardholder make a deposit that acts as their credit limit.

Bottom line

While having bad credit can be a major headache, it’s not a life sentence. There are many things you can do to improve your credit score, from working with a credit consultant to setting up a budget that helps you pay off debt and stay in the black. Putting in the work to build up your credit score is well worth your time and effort because when your credit score is good, life is a whole lot easier.

 

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