Most teenagers head off to college without knowing a thing about credit. People often find themselves just getting through it in their early 40’s if not later. The good thing about credit is that you can improve it and you can start at any time. However, bad credit will not improve overnight and in the meantime you can be setting yourself up for a world of problems.
In this article you will find nine reasons why you need good credit. This list is not only things that make life more fun, or a bit easier, but some of them are crucial to living life without constant problems.
1) Buy a Car
Buying a car is not impossible with poor credit, although poor credit can make it much more difficult, and expensive. Most people require a lender to buy a car. The first thing that lender will do is look at your credit score, and how you manage your credit. The lender wants to know that you will be able to pay back your loan.
Many people think that if you don’t pay back your loan the lender will simply take the car, and sell it, making money anyway. However, it doesn’t work that way. And if that is the way you think, then you might already have bad credit. That is exactly how the lender will think as they review your credit usage. To offset someone with poor credit, a lender may accept your application and give you a loan, however you may have to pay an abysmal interest rate, and be caught in a loan that is not worth the value of the vehicle.
Of course the other option is being turned down entirely for a car loan, which is becoming much more common.
2) Buy a House
If you have bad credit you can pretty much say goodbye to a mortgage. But there is always someone out there willing to do it for the right price.
One of the reasons why banks won’t even look at you, if you have bad credit, is because of the problems associated with the country’s last real estate crisis. Lenders were giving loans away to people who they knew couldn’t afford it. This caused so many problems and foreclosures that the banks are now much more cautious than before.
The slightest ding on your report, such as a missed payment, is enough reason to turn you down. If you do somehow find a lender willing to give you a loan, you can expect a much higher interest rate, as well as the need to put more money down prior to purchase.
3) Rent an Apartment
Even renting an apartment can be difficult with bad credit for the same reasons as in trying to get a loan. The landlord, or property manager, wants to know that they will be receiving their rent every month. You need to keep in mind that the person who owns the apartment or home is likely still paying off the mortgage. That mortgage is dependent upon you paying your rent. It’s a cycle that the landlord needs to know will pay off.
However, getting an apartment with bad credit is slightly easier than getting a car loan or a mortgage. The only problem is that it might cost you more than you were hoping or planning. You may need to pay one to two months of additional rent, and a higher security deposit. Or, you may be restricted to the length of time you can rent the property, such as a month to month, or a three-month rental agreement that is strictly subject to eviction if you are even a couple of days late in payment.
4) Get a Bank Account
Bad credit is one of those things that can affect you in many ways. Even if you are trying to repair your credit and become better at money management there are obstacles you are going to have to face. One of those may simply be getting a checking account.
Remember, it is a bank who gives you a loan. So, why would you think that same bank would shirk on their commitments to other customers by allowing someone with poor money management skills to bank with them. From the bank’s perspective they see poor credit as someone who is more likely to bounce a check, write bad checks, overdraft their account often and a variety of other money management problems that costs the bank time and money.
The good thing is that many banks have a “beginner” program. This is a simple checking account that has fewer benefits than a traditional bank account, however it does give you the opportunity to store your money and retrieve it as necessary. You may be subject to lower withdrawal limits, daily spending limits and you may have to pay more fees.
5) Obtain a Personal Loan
Personal loans can be used for a variety of things. You may need to pay off your credit card balances. You may want to go on a vacation. Or, you may simply catch yourself in a financial bind. Whatever you need a personal loan for, you may find yourself, much like other loans—on the losing end.
A personal loan is also dependent on how well you have managed your credit in the past. Again, the bank wants to know that you can pay off this loan. In addition to having a high interest rate, you may also be subject to putting up collateral or asking someone with better credit to cosign the loan for you. This puts that person at risk if you default on the loan, often leaving a loved one to take on your responsibility.
Unless you need a personal loan, if you have bad credit, you may just want to avoid it. Often the cost of fees associated with the loan you would get is going to cost you much more than whatever it is you need the loan for.
6) Better Car Insurance Rates
While a relatively new practice in terms of evaluating credit, car insurance is now affected by your credit. There have been many studies which show a direct correlation to how well you manage your money and how well you drive. Studies show that someone with poor credit is more likely to be involved in a car accident, or be driving a car more prone to accidents. Regardless which case it is, if you have poor credit you are likely going to be hit with rates that are 30% or more higher than someone who has good credit.
In addition, car insurance companies have even begun rewarding customers who have good credit, with additional discounts and rates applied to already good rates. While most car insurance companies are willing to give someone with poor credit insurance, there have been some larger companies who are opting on the safer side of denying you coverage.
While it may not seem fair to be denied something required by law, it is legal to deny drivers car insurance. Lucky for you there are plenty of companies who will cover you—at a premium of course.
7) Avoid Higher Interest Rates
Having good credit will do wonders for you anytime you need something, especially those pricier items. Everything from buying a mattress, an engagement ring to a car or home is dependent upon credit. And as mentioned before, interest rates will play a factor in a lenders decision to trust you with their money.
Exactly how much will a higher interest rate will really affect you would depend upon what you are trying to buy. For example, if you were to get a car loan for $25,000 with a 3.11% interest rate, you would end up paying $27,026 for the vehicle. A 60-month loan would cost approximately $450 a month. That same loan with bad credit would have a 12.95% interest rate and cost you $34, 091 for the vehicle with a $568 monthly payment.
That’s a big difference for the exact same vehicle.
8) To Get a Job
Getting a job can also be a factor when it comes to good and bad credit. In all fairness, the type of job you are applying for will play a role in whether or not you are given or turned down for a job due to your credit.
Employers who are looking for someone to manage money for their company, or manage money for their company’s clients will often want to make sure the person they are hiring is capable of managing their own wealth. The obvious correlation the company is trying to make here is that if you can’t handle your own money, how in the world will you be able to handle the companies millions of dollars.
Many of these jobs may include investment bankers, a company’s treasurer, accountants or company leaders. While this is not a new trend in business, it has started to seep down into lower levels and this is because many companies, valid or not, feel that your credit is a direct link to your work behavior. Hence, if you have good credit, you are a more responsible and conscientious worker.
9) Personal Well-Being
Lastly, having good credit gives you personal well-being. If you haven’t had good credit in a while, you may not believe the lack of struggle people with good credit face. If you have good credit, you may not realize the struggle that people with bad credit face. The stress level of being turned down for a loan, job or paying high interests rates is obvious. This is especially so since one of the reasons people have bad credit is simply the inability to pay their bills because they don’t have the money to pay their bills. And not being able to pay your bills may give you bad credit which may prohibit you from getting a job to give you the money to pay those bills.
It’s a difficult circle to escape from.
However, there are many programs available to help people step out of their personal credit crunch, and many of them are offered by the banking lenders who turned you down for a loan. By understanding how credit works and implementing that into your life you will be much better off. While it may take some time, you can always improve your credit, and therefore improve your life.