If you haven't checked your credit score, it's probably time to do so. Knowing your score (and knowing if it needs to go up) is essential to take control of your finances.
This is especially true for young professionals, who don't have extensive credit histories and could be unaware of a low score that might hold them back. In fact, the Consumer Finance Protection Bureau reports that 26 million Americans are "credit invisible" (meaning they have no credit history)—and over 10 million of them are under the age of 25.
Lenders use credit scores to determine your attractiveness as a loan candidate. But even if you're able to secure a loan (for a car, a house, a credit card), you're not out of the woods. Having a lower score can still raise your interest rates—and cost you more money over time.
Credit Cards And Interest Rates
Having a low credit score doesn't prevent you from securing a loan or getting a new credit card, but it can have repercussions. If your credit score is low, pay particular attention to the interest rate, also known as the annual percentage rate (or "APR"), when you apply for a new line of credit. The lender definitely is!
When you apply for a credit card—whether that's while you're in college or after—the credit card company looks at your credit score to judge how dependable you are paying back your debts. If your score is high, they may offer a lower APR. Someone with a lower credit score, by contrast, may end up with a higher APR. If you don't pay your balance in full each month, that . A person with a low score will also have to pay higher interest rates if they've defaulted on the terms of their agreement and make a late payment.
The same holds true for larger loans, like mortgages or car loans. Someone with a very high credit score may receive a lower interest rate than someone with a lower score. However, installment loans (like mortgages) tend to be much larger than revolving loans (like credit cards), which means the amount of interest that builds up on them over the years can be substantial—so you'll want your interest rate to be as low as possible. Otherwise, the cost of borrowing could hit your bank account hard.
Have you heard someone shrug off a low or nonexistent credit score by saying they don't plan on borrowing money any time soon? They may not know that bad credit can hurt you in other ways. For instance, in many states, car insurance costs more for people with poor credit. Landlords are permitted to check credit before renting an apartment, too.
Also, before offering you a job or promotion, an employer may check your credit—especially if you'll deal with cash or valuables. The thought is that people with large debts or other credit problems may be more likely to steal or commit fraud. Some employers are convinced that people who manage their credit well are better workers than those who don't.
Employers who check credit histories typically look for serious negatives, such as collection actions, repossessions, foreclosures, and evictions.By proactively explaining that the problem has been resolved, was the result of something beyond your control, or could be fixed simply by being employed again, you could bolster your chances of landing the job.
Improving A Low Credit Score
If you currently have a low credit score, you can take steps to improve it. The first one: learning what goes into your score, as well as why your score is low. Once you do this, you'll know the issues you'll need to address, though some will be easier to fix than others.
For instance, you may have a tough time hiking up your score if you have a default or bankruptcy in your credit history (tough, but not impossible!). However, if you're simply using up too much of your available credit, charging less or asking your credit card company to increase your limit could give you a boost.
Here are some other potential ways to improve a low score:
- Review your credit report, and report any inaccuracies.
- Pay your bills on time and in full.
- Reduce the amount of debt you owe.
- Avoid opening several new accounts at once.
And if you're among the "credit invisibles" with no score, know that you can build credit if you're against taking on debt. You could apply for a secured credit card with your banking institution; in addition, some credit bureaus will put rent payments in your credit history. No matter how you do it, remember this: lenders can't see you in a good light if they can't see you to begin with.