A low Credit score can cost you dearly in terms of extra payments over the years toward something like a home loan. The difference between a credit score of 579 as opposed to 760, for example, for a 30-year fixed loan for 80 percent of the value of a property that sold for $300,000 could translate into some $300,000 in additional interest over the life of the loan.
On a typical auto loan from a bank, a borrower with a low score would be charged a higher rate and likely pay at least several thousand dollars more in interest over the life of the loan. In the realm of credit cards, too, the best offers, rates and terms are reserved for consumers with the best credit. People with flawed credit profiles are severely penalized.
Most people have at least a general awareness of the importance of credit with regard to traditional borrowing. as it relates to mortgages, car loans and credit cards. What they are typically not aware of is the influence of personal credit in areas that extend beyond the realm of traditional borrowing. If you are like most others, not only would you not be aware of these aspects. Most likely, you would be quite surprised.
Many popular misconceptions about consumer credit can hinder or even hurt people, in their efforts to make the system work to their best advantage.
The following myths, followed by brief corrections, may arguably be considered the top ten:
- "Every person who has a credit record has a credit score." No one has "a credit score." What each consumer has is actually a variety of different credit scores.
- "I can choose to 'opt out' of the credit system by simply paying cash for everything." Only someone living as a hermit in a remote area, never paying for rent, utilities or phone service could truly opt out of the credit system.
- "My credit profile is the same at all the credit bureaus." Credit profiles - and scores - can vary significantly, from one reporting agency to another. This fact has serious ramifications for your personal credit strategy.
- "I'm entitled to a free copy of my credit report and credit score." You are entitled by law to free copies of your credit reports, under certain conditions. You are not entitled to receive any of your scores for free, however, although there are ways that you can obtain some of your scores without paying for them.
- "Anyone who wants to get a copy of my credit report needs my written authorization." In reality, the Fair Credit Reporting Act (FCRA) allows anyone to pull a person's credit report (with some restrictions) as long as the person or business retrieving the report has a "legitimate business need for the information in connection with a business transaction involving the consumer," which in actual practice can mean almost anything.
- "My credit history and scores will only affect my applications for credit." Credit profiles and scores are now used in numerous other areas, apart from applications for credit, including employment, insurance and even health care.
- "There are only three credit bureaus worth knowing about (Equifax, Experian and TransUnion). ". This was largely true until quite recently. Now the advent of a new "super" credit bureau suggests that landscape may change significantly.
- "The only thing that can remove negative entries from credit reports is the passage of time." Waiting is certainly one option but there are also numerous steps that consumers can take to proactively repair damaged credit.
- "All negative information on credit reports is dropped after seven years, except for bankruptcy, which stays on for ten years.". There are a number of important exceptions to this rule, exceptions that allow negative information to remain on a consumer's reports indefinitely (that's right: forever).
- "Closing a credit card account will lower my credit score.". This is possible but not necessarily true. Knowing when you can close down accounts without penalty can save you from effectively being blackmailed into paying years of annual "membership" fees unnecessarily.
As just mentioned, credit profiles and scores have influence that now extends well beyond the world of borrowing. Landlords, of course, use credit histories and scores to screen applicants. Those with credit issues may be rejected. Most auto and homeowner insurers use credit information in setting premiums, based on the correlation between good credit and low claims costs.
The most important factors in determining car insurance rates are said to be age, place of residence and driving record. When quoting a rate, however, most insurers also check a driver's personal credit. The reason is the strong positive con-elation between credit scores and the likelihood of filing an insurance claim. The higher a driver's credit score, the less likely that person is to file a claim.
A handful of states, such as California and Massachusetts, forbid insurance companies from checking credit scores. Efforts to ban the practice nationally through federal legislation have consistently failed, however.
A recent study conducted by Carlnsurance.com found that drivers with high credit scores pay substantially less than drivers in the same age bracket with scores that are only average. The version of your credit score that insurers use is not a true FICO score (discussed in detail below) but a variant used specifically by auto insurance companies. In this version, factors deemed to reflect risk - such as bankruptcy filings and fully used credit limits - are given more weight.
The Carlnsurance.com study found that young adults aged 25 to 34 with clean driving records and credit scores of 750 and above pay an average of 40 percent less than drivers in their age group with clean driving records who do not have high scores. Although premiums tend to drop with age, drivers in higher age groups with the best credit scores still pay less. In fact, the study found that the average lifetime savings for drivers with good credit totals $23,000.
If you can achieve this type of savings in a number of different areas of your life - depending on what age you begin - with the magic of compound interest, you may have an additional million dollars upon retirement. As we will repeatedly demonstrate, good credit pays.
Not only can your credit history affect your insurance rates, it may also affect whether you are hired, promoted or fired. Six out often private employers check the credit histories of at least some of their job applicants, according to a survey by the Society for Human Resource Management. Thirteen percent use credit checks for all their employees, regardless of whether the job has anything to do with handling money (the traditional rationale for checking).
This practice exists in spite of the lack of evidence linking bad credit and theft or any other on-the-job problem. Employers' ability to check credit reports is restricted in six states (California, Connecticut, Hawaii, Maryland, Oregon and Washington) but these restrictions are limited. Examples of exceptions are jobs in finance or those involving access to large amounts of cash
The federal Fair Credit Reporting Act (FCRA) requires that employers obtain an applicant's or employee's written permission to conduct a credit check. As a practical matter, however, the individual has little choice. If you want the job or want to keep your job, you must agree.
If the annual salary for the job involved is $75 000 or more, the information that will show up on the report will not exclude negative items that are more than seven years old—or ten years, in the case of bankruptcy. In this case, the reports may show negative information going back in time indefinitely. This is an exception provided for in the Fair Credit Reporting Act.
The logic behind the use of credit reports to screen applicants and employees is to minimize the likelihood of theft or embezzlement, exposure to lawsuits in the event of misconduct on the part of an employee and to assess a person's overall reliability. Presumably, a person under financial pressure from collection accounts and outstanding judgments (unpaid debts that creditors have a right to collect) is more subject to the kinds of behaviors that an employer seeks to avoid.
Unlike the demonstrated correlation between credit scores and insurance claims, there is no actual evidence of any con-elation between credit profile data and on-the-job behavior or performance, however.
The use of credit checks by employers spans all industries. It is not just limited to financial institutions, law enforcement. government jobs requiring security clearance and the health care industry, where employees have access to sensitive patient data and closely regulated drugs. Access to customer credit-card data, in any industry, could be used to justify a credit check. Waiters, waitresses, store clerks, online support personnel - the number of people potentially affected is much larger than one may at first think.
The top two reasons for a negative outcome resulting from a credit check are current outstanding judgments and accounts in collection (unpaid debts that a creditor has the legal right to collect). If the negative decision is openly attributed to the credit check, you have a right to receive a copy of the report at no charge if you make your request within 60 days. In this case, the employer must give you the name and address of the credit bureau or bureaus from which your information was accessed.
More likely, however, most employers probably aren't going to disclose an applicant's or employee's being rejected or fired on the basis of information in his or her credit files. It's much easier for an employer to provide another reason or, in some cases, not to offer any reason at all. The people this places in the worst bind are those who have bad credit in part because they lost their jobs but can't get another job because of their bad credit. To paraphrase Yogi Berra, it's Catch-22 all over again.
If you think being turned down for an apartment, an insurance policy or a job can be a serious inconvenience, imagine what it's like to be refused emergency medical treatment because of your credit score. That's right: When it comes to hospital admission, your credit score can literally be a matter of life and death. A low score, even if it's based on erroneous information, can prevent someone from being admitted to a hospital, for urgent medical care.
Sometimes a life-or-death situation that hinges on credit can occur outside the context of a hospital. Recently, a senior citizen in poor health wanted to move out of his New York City sixth-floor apartment, with no elevator, to subsidized housing with no stairs to climb. His application was denied when his credit record showed a default judgment of which he was not aware. The judgment was vacated upon appeal with the help of a legal aid society for the indigent. Before the stain could be removed from his credit file, however living under the strain of six flights of stairs to navigate - the man died.
