5 Ways Credit Can Make or Break You

Even if you’re not planning to take out any loans or open credit cards in the next several months, you’ll want to make sure you’re doing everything you can to improve your credit score.

There are a few reasons for this. First, if your credit score isn’t great, you should definitely be working toward a higher credit score. Second, you never know when you may need to access credit, and it takes months — often years — to make significant improvements to your credit score. Finally, credit scores have a bearing on more than just lenders’ decisions to give you money.

Like it or not, credit can make or break many of your life decisions and how much you spend on day-to-day needs. Here are a few examples.

1. Higher Interest Rates

Needing a loan is a common consumer experience, but getting an affordable one can be tricky, especially if your credit score isn’t great. People with the best credit scores get the lowest interest rates, because lenders have great confidence in their ability to pay their bills on time.

With credit cards, it helps to maintain good credit, because you may be able to call your issuer and negotiate a lower interest rate after you’ve shown several months of responsible credit card use, like paying your bills on time and using a small portion of your available credit.

2. Employer Credit Checks

In some states, potential employers can — with your permission — request your credit reports (but not your credit scores) as part of the applicant-review process. There are different schools of thought on whether or not your credit history is indicative of your worth as an employee, but the controversy doesn’t prevent certain employers from looking at your credit. If you’ve worked hard to build an impressive professional background, you don’t want credit problems to sabotage your job prospects.

It’s a good idea to check your credit report before applying for jobs, in case you need to be prepared to explain any negative things that appear there. You’re entitled to a free copy of your credit report every year from each major credit reporting agency, and a job search may be the perfect time to take advantage of that tool.

3. Emergencies

Emergency funds are consistently touted as a money priority for every consumer, so here’s yet another case for it: If you’re in the middle of a stressful life event, the last thing you want to do is apply for a loan. But if you haven’t put the effort into building a solid emergency fund to cover between three to six months of living expenses and you suddenly find yourself in the midst of an illness, natural disaster or unemployment, your options for making ends meet may be limited.

Those options are even more limited if you have limited credit at your disposal. A personal loan or credit card may be exactly what you need to pay for the necessities until you can recover from the emergency, but without those options, you may find yourself with bills you can’t pay. That could lead to collections accounts, which in turn hurt your credit scores — it can turn into a nasty cycle of credit misery.

4. Life Milestones

Many Americans dream of owning their own homes or cars, and the better your credit, the more attainable (and affordable) those dreams are. In most parts of the country, cars are the main form of transportation, and the inability to get a car loan may limit your employment options. And if you live in an area where rent prices are high, you may end up spending a lot more money renting over a long period of time because you can’t qualify for an affordable mortgage.

5. Renting an Apartment

Speaking of housing, poor credit can haunt the nation’s renters, too. Landlords check credit on potential tenants, because they want to know if you’ve paid your bills on time in the past, and poor credit could mean rejection of your rental application. You could potentially pay a higher security deposit because of poor credit, and many utility companies take a similar approach to customers with low credit scores. You may have to pay a hefty deposit to a power company, which you won’t get back until you’ve established a pattern of good payment behavior.

With so many aspects of your finances relying on your credit score, it’s smart to know what it is and make a goal of improving it (or maintaining it, if you have a high one). There are dozens of credit scoring models out there, but if you compare the same model over time, you will have an accurate picture of how your behavior has helped (or hurt) your score. You can do this comparison using a free tool like Credit.com’s Credit Report Card, which gives you two credit scores used by lenders across the country.