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If there was ever a time to pay attention to your credit score, this is it.
The financial crisis brought on by COVID-19 has had ripple effects on the finances of nearly everyone in the U.S., regardless of whether or not your employment has been jeopardized. By keeping track of your credit score, you can ensure you aren’t unnecessarily penalized in areas where you are entitled to protection under federal stimulus legislation.
Your credit score might be just a number, but those three digits influence countless areas of your everyday life. Whether you want to buy a car, get a job, or even rent an apartment, your credit score will follow you everywhere. Having good credit is advantageous in many ways, while having bad credit may cost you money in ways you may not expect.
Benefits to Having Good Credit
The best way to get a low-interest rate on a car loan? You guessed it: having good credit. The average monthly auto loan payment for a person with a high credit score (720–850) is $360 per month at 3.88% interest, according to data from myFICO. For someone with poorer credit (590–619), they will pay $444 per month for the same car — at an interest rate of 14.68%. The high-credit customer will end up paying $1,300 in overall interest, versus $5,320 for the low-credit customer.
Mortgage approval and lower interest
Mortgage lenders not only set interest rates based on your credit, they’ll also use this information to determine how much of a loan they’ll give you in the first place. With good credit, you can better afford a home.
Landlords use several factors to assess whether you’d make a good tenant, including proof of adequate income and references from past landlords. But some may decide to take your credit into consideration as well. Credit is a good indicator of your overall financial responsibility and the likelihood you’ll pay rent on time.
Credit card approval and lower interest
With good credit, lenders are more likely to approve higher credit card limits at lower interest rates. Not only will you have to pay less in interest on any balances you carry, but your credit score won’t be as impacted due to a lower overall credit utilization ratio.
Business loan approval and lower interest
You might think your personal credit and business credit are separate, but that isn’t always the case. Small business owners and sole proprietors often need to use their personal credit history to take out business loans.
Auto insurers use your credit score as one of many factors in determining your risk as an insured driver. Good credit is seen as a sign of overall responsibility and can land you lower premiums.
Depending on the type of position you are applying for, some employers will pull your credit report and use it to help determine if they will hire you. They will need your consent to do so.
Even those with good credit can fall on financial hardship due to circumstances out of their control. If you suddenly lose your income but have a solid credit repayment history, your lenders may be more willing to renegotiate the terms of your loans, including lowering interest rates to reduce payments.
You cannot hide from your credit score; it follows you your entire life. That’s why it’s important to understand the consequences of good or bad credit so you can take action.
The Consequences of Bad Credit
Once delinquent accounts are sold to debt collectors, you can expect to start getting phone calls around the clock. These collection calls soon become a major intrusion in your daily life. If you have a cosigner on any of your accounts, those people may start getting calls, too.
Higher insurance premiums
Your home and auto insurers use your credit score to help determine your risk as an insured party. When your credit scores go down, this could mean your insurance premiums will go up.
Obstacle to employment
While employers can’t check your credit score, they may decide to look at your credit report, with your consent, as part of a hiring background check. In some circumstances, having bad credit could work against you.
Utility companies often check your credit before beginning service. If you have bad credit, they may ask you to put down a deposit. If you fail to pay your bill on time, the deposit will be used to cover the outstanding amount.
Bad credit could lead to your rental application being rejected by a rental agency or landlord.
Having poor credit leads to negative consequences if you plan to own and drive a car. Not only do auto loan applications require a credit check, but insurance companies will also want to know your credit score before they give you a quote for a policy. With bad credit, owning a car can quickly become much more expensive than it should be.
What This Means For You
Everyone’s primary goal right now should be staying healthy, but the resulting financial implications simply can’t be ignored. By working to keep your credit score up, you’ll be in a much better place to exit the crisis on the right foot. “While people are focused on their health, it’s important not to forget about your credit obligations, so you don’t end up with late payments hitting your credit reports,” says John Ulzheimer, formerly of FICO and Equifax. “Those will remain a whole lot longer than COVID-19.”