You may know that lenders check your credit when you apply for an auto loan, a credit card, or a mortgage. But when you're signing up for a cellphone plan or renting an apartment, companies may also check your credit to guess at your ability to make timely payments. Prospective employers may too.
So having good credit can help you out in all sorts of ways, not just when you're trying to borrow money.
Your credit score is the number that lenders use to assess your creditworthiness, which includes your financial history and credit-to-debt ratio. A good credit score (670 and above) can indicate that you hold yourself accountable for paying your bills — and having good credit overall is a bigger advantage than you may realize.
Good credit can:
You cellphone provider will probably do a credit check when you start a monthly plan or finance a new phone. In the latter case, if your credit score is below 650, you may be required to pay an upfront deposit, says credit industry analyst Ted Rossman, who works for Bankrate and Creditcards.com.
A new smartphone is a major purchase: One could set you back $700-$1,000. If you're working on your credit score and it's not great yet, you may be required to put down a larger upfront deposit of anywhere from $50 to $750, depending on the carrier and device you choose. Though your monthly payments will be lower with a larger deposit, your financing rate might be higher on a cellphone.
If your credit is poor, you may not qualify for a monthly plan at all. That means you're limited to prepaid plans, which require upfront payments for both the phone and for data, minutes, and texting. Prepaid plans might be a good idea if you're an infrequent smartphone user, but in many cases they end up costing you more money in the long run.
If you're switching providers or opening a new account for basic utilities like water, gas, or electricity, and your credit score is under 650, you may have to put down a deposit, says credit expert John Ulzheimer, who has worked for FICO and Equifax. A deposit helps your utility provider feel assured that you'll pay your bill on time and in full each month. How much of a deposit they ask for varies depending your location and average monthly costs.
In the New York metro area, for instance, deposits are calculated at twice the amount of your average monthly bill, according to National Grid. If your bill is $106, the average monthly residential electricity bill in New York state, your deposit would be $212.
If your credit score is in the low 600s, Ulzheimer says, a landlord may ask for more than a single month's rent upfront in addition to your security deposit to provide a cushion in case you stop making payments. (In certain locations, like New York City, laws prevent landlords from collecting more than one month's deposit.)
Your security deposit, which is collected at the beginning of your lease term, will be drawn from to cover any damages to your rental. A deposit made as a cushion due to low credit will be refunded in full, assuming you make your rent payments.
A good credit score can help you nab a lower rate on homeowners insurance, which covers damage to your home or property due to fire, hurricanes, or other disasters.
Although rates vary and depend largely upon the risks in your specific location, the home's claim history, and other factors, poor credit may result in a 30% increase in insurance rates, depending on the company, says Loretta Worters, vice president of media relations at the Insurance Information Institute.
Insurance providers will take into account your credit history as one of many factors that go into your application, says Worters. With good credit, she adds, you're more likely to get a rate that's near the average of about $1,200 a year.
A prospective employer may take a look at your credit history before hiring you for a new role: 72% of employers conduct background checks on potential new hires, and, of those, 29% check credit reports. When they do this, employers are taking in your overall picture, like your payment track record and the length of your credit history.
Rossman says that prospective employers are looking for red flags "that could suggest a lack of discipline, accountability, and follow-through."
That's because "employers also want to make sure that you're not in deep financial distress with too much debt. And mishandling your own finances could bode poorly for your ability to handle the company's money," says Rossman.
This article has been updated to clarify that some entities review your credit history rather than your credit score.
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