Your credit score affects your life in several different ways and can either help or hinder the way you spend money. A bad credit score affects your ability to obtain loans and makes it challenging to buy a car or rent a home. Credit scores and the credit system help rank people based on their financial credibility, meaning your credit score is used to track your credit history and represents statements of your financial responsibility. Credit scores are one of the most important factors of being financially independent.
The higher your credit score, the more responsible and trustworthy you appear to banks, employers, and loan companies. A low credit score can take a significant amount of time to improve. We outline how your credit score affects you, and ways to keep your score from dropping too low.
What do credit scores affect in your life?
Your credit rating affects your ability on how you make transactions, especially on large-scale purchases like a house or a car. It can affect your eligibility to be granted loans, higher lines of credit and your credit score can even impact your home and auto insurance rates, all depending on where your credit score falls on the Canadian credit scale. If not taken care of diligently, your credit score can end up working against you when you’re in a bind and may need some extra cash.
How does bad credit affect you?
Buying A Car
Chances are you might not have the ability to drop $15,000 on a car all at once. So, you’re going to need a loan. Depending on where your credit score lands on the credit scale, that credit rating will determine how large of a loan you will receive.
Ideally, your score should be in the mid-600 range and above. Keep in mind that every auto lender will have different requirements. It wouldn’t be impossible to get a loan with a lower score, but it may not cover the cost of the car or it might have stricter regulations.
Renting a Home
The most common way your credit score affects your life is if you’re looking to rent a place to live. Landlords want to know the person living in the property will be taking care of the place, as well as being able to pay rent on time in order for the landlord to cover the expenses of the building and its upkeep.
Bad credit can affect your ability to rent because a landlord can deny you a lease if your credit score is too low. A low credit score can be viewed as unreliable when it comes to paying rent which would end up costing the landlord more money to cover the property’s expenses.
If you’re trying to rent an apartment, you should aim to have your credit score as high as your current lifestyle permits but ideally anywhere over 600. However, it will be up to the individual landlord to determine what credit score average they would like to see from an applicant.
Buying a Home
Similar to buying a car, your credit rating affects your ability to be pre-approved for a mortgage and down payment on a home. There are two steps to this process that your credit score will have a direct impact on determining how much money you get and if you even qualify to buy a home.
How Bad Credit Affects You Getting Pre-Approved
A pre-approval lets you know:
- how much money you can expect to get for your mortgage
- how often and how much your mortgage payments will be
- give you an interest rate for a specific amount of time
For the pre-approval stage, bad credit can affect your ability to:
- get the approval at all. A mortgage lender may deny you a loan if your score is too low.
- They might give you a higher interest rate
- Request that you give more money as a down payment.
- Require you to ave someone else co-sign the home to show that you have someone backing your financial responsibility.
How Bad Credit Affects Your Mortgage Rates
To qualify for a mortgage you’re going to need to prove that you have enough money to make your payments consistently.
A mortgage broker is going to look at several things to see if your eligible for a mortgage. But in terms of credit, they’ll look at two things:
- credit score and report
- debts
Your credit rating affects your ability to get a high loan and low-interest rates. On top of that, any outstanding debts, the amount of debt, and how well you’ve been making payments will also impact your chance to get approved for a mortgage and at a good rate. The simplest way to avoid bad credit in order to get a loan is to pay off any outstanding debts as quickly as you can.
How Your Credit Score Affects Relationships
Surprisingly, having bad credit and your credit rating affects your ability to have a long-term relationship or can be a contributing factor in choosing a partner. Having a lower credit rating can be seen as financially inefficient and be less likely to be chosen as a partner. Getting married also means inheriting your partner’s debt. So both parties need to be aware of the other’s financial situation including debt and credit rating. Therefore fiscal responsibility and being money savvy can play a huge part in the outcome of choosing a partner and being in a relationship.
Credit Cards
Not surprisingly, your credit score and credit cards go hand in hand. If you’re not paying off your credit cards consistently, the banks are going to limit how much money you can put on your card: your credit limit. They can also raise your interest rates costing you more money in the long run if you can’t make timely payments.
Your credit rating will also affect your ability to apply for a new credit limit. If you’re struggling to maintain upkeep on your credit card payments, raising your credit limit may become more difficult because your history shows that you’re unable to maintain the limit you currently have. This means if you’re planning on making any large purchases in the future you may encounter some issues.
Credit Checks
There is a myth that when you frequently ask to see your credit score, your credit score will change. But that’s not entirely true. There are two ways to check a credit score and both have different outcomes.
Soft Inquiry
A soft inquiry on your credit score happens when a lender is looking into your credit history for information purposes such as pre-approval for a loan, or if you want to check your own score. A soft credit inquiry doesn’t show up on your report and does not impact your credit score.
Hard Inquiry
A hard inquiry is when you have applied for some sort of loan and the lender has requested your credit report in order to determine approval for your application. This is the type of inquiry that can impact your credit score, especially when too many hard inquiries happened over a short period of time.
For example, if you’re trying to get an auto loan, mortgage applications, student or personal loan, several different applications will be flagged by the lenders and indicate that you might not have the funds to support the loan.
How Your Credit Score Affects Insurance
Another important factor to consider is how your credit score affects your insurance rates. It’s common for insurers to check your credit rating when applying for home insurance but some provinces also allow insurers to do the same for auto insurance. Insurance companies can review your credit history to determine if they:
- want to approve you for insurance
- determine your insurance rate
However, this does depend on the province you live in. Ontario and Newfoundland are currently only the two Canadian provinces that have not yet approved auto insurers to check credit scores.
While your credit score affects the amount of coverage you can receive, a few late payments won’t affect your rate. If you end up being consistently late with insurance payments, then that will negatively impact your credit rating and future insurance quotes.
Every time you make a transaction or pay a bill, you have a chance to boost your credit score and improve your credit rating. Your credit rating affects your ability to do anything from getting a new credit card, having a long-term relationship to getting car and home insurance. In order to keep bad credit from affecting you, it’s important to be increasingly on top of paying off credit cards, bills, and any loans you may have. Increasing your credit score doesn’t just help keep your finances in check but it also helps to open up new financial opportunities as well.
Frequently Asked Questions
What are the most important things you can do to improve a credit score?
Make regular payments on credit cards and any outstanding loans and debt. Even a single missed payment can have ramifications on your credit score. Aim to pay the minimum payment each month.
What hurts your credit score the most?
Inconsistent use with your credit cards is one of the biggest factors that can affect your credit score. This can happen in several ways.
Not actively using your credit card account for an extended period can hurt your score. Periods of inactivity show as inconsistent to lenders and it may limit your credit history. Limited credit history might not be able to give lenders a comprehensive picture of how you can handle money which can make them unwilling to lend to you.
Lenders like to see that you can balance multiple accounts, so suddenly closing an account, even if it’s paid off, might impact your score. That doesn’t mean go crazy and open up several lines of credit, but be actively responsible with the accounts you have.
Moving all your balances to one single card can also work against you. It may seem more logical to have all your credit and balances in one place, but it actually pushes your balance higher towards your credit limit. And the closer your balance owed is to your credit limit, the higher risk you become. So if you have multiple accounts that you can manage with lower balances keeps you low risk in the eyes of banks and money lenders.
What are two things that help your credit score?
If you can’t make the full payments of a credit card balance, aim to pay off the minimum amount owed each month. So while you still have a left over balance, this shows your dedication and reliability in paying off your credit and keeps your credit score from taking a larger hit.
Stay well below your credit limit. Keeping your balance relatively low and within a reasonable amount shows that you can spend responsibly. Pushing your balance consistently towards the higher end of your credit limit shows erratic spending and makes you a higher risk.
What credit score do lenders look at?
Each lender is going to have a different standard for credit scores when reviewing your application. Typically a credit score from 650 and over puts you in a good place to get a loan. A credit score in the 700’s and over is considered excellent credit. Keep in mind that the nature of your loan and the province you’re in will differ and the ranges may change.