by Christy Bieber | Dec. 24, 2018
Your credit score is one of the most important numbers in your life. It's used by many different individuals and companies to give them an indication of how responsible and reliable of a borrower you are. Because your credit score is so important, you need to understand how it's calculated and what you can do to increase it.
While many people know their score is important, some people believe their score won't matter if they don't intend to ever borrow money. A plan to be debt free for life and not to ever use credit can make it very difficult for you to build a good credit score.
Unfortunately, even if you don't want to borrow money in the future -- even for big purchases such as a home or a car -- you still need to care about your credit score.
It's important you use at least some credit to build a favorable credit score because your score is used for lots of other things besides just borrowing money. In fact, there are five key people or entities that consider your credit score in deciding whether to do business with you that have nothing to do with taking out a loan or opening a credit card.
When you rent an apartment, landlords want to make certain you're going to be responsible with paying the rent. To get an idea of your trustworthiness, landlords check your credit score. Your score will both determine if you can get approved for an apartment at all and also what security deposit you have to put down.
Whether you live in a home or an apartment, you're going to need access to utilities such as water, gas, and electric. Utility companies also want to make certain you're likely to pay the bills for the services you've used, so they'll check your credit too.
Utilities won't generally refuse you if you have a bad credit score -- they still need to connect your electric box and provide basic services. However, they will require you to make a large security deposit if your credit score is bad or if you don't have credit.
Unfortunately, this means you could end up having to pay several hundred dollars just to get hooked up to essential services.
If you want a cell phone, your chosen cell provider will check your credit to determine if you can qualify for a phone on contract.
If your credit isn't good, you may not be eligible for a phone plan that allows you to pay monthly for talk and text. Instead, you may need to buy a pre-paid cell phone where you buy minutes and data before using them.
There's a more limited selection of pre-paid phone options compared with phones sold to customers on contract, and you may both be restricted in which carrier is willing to provide you with a phone and which model of phone you're able to use.
In the majority of states, car insurers look at your credit score as one factor that helps them to determine the risk of insuring you.
The credit score considered by your insurer is a little different than the score lenders view. The car insurer doesn't consider your income history, your gender, or any personal information -- they are solely focused on the likelihood you present a higher risk of an insurance claim due to your behavior with credit. Some of the factors considered include:
Car insurance is something you'll likely have to pay for throughout your entire life, so just the fact that your insurer considers your credit history shows how much credit scores matter even when you don't intend to borrow money.
An increasing number of employers are including credit checks as part of a comprehensive evaluation of candidates.
When an employer checks your credit, it doesn't see your account numbers or your credit score. The credit report your employers view also leaves off information that it's illegal to consider in hiring, such as your marital status or your birth year that indicates your age.
The report shows how much total debt you have, how much credit you have available, and your payment history on your listed accounts. Employers use credit checks to determine if you're responsible, and to assess whether you're in financial distress.
Many employers don't want to hire workers who aren't good at managing their own money; who might be susceptible to embezzlement or bribes; or who are irresponsible in living up to their commitments. Checking credit is seen as one way to make sure a candidate is financially responsible.
However, there are certain consumer protections in place when it comes to employers checking a candidate's credit.
Under the Fair Credit Reporting Act, which applies nationwide, you must be provided with clear and conspicuous written notification that an employer checks your credit. You also must give written permission before an employer is permitted to conduct a credit check. Because of this, you have advanced warning. So, if you know you have a history of problems on your credit report, you can be proactive about talking with your employer.
You also have a right to be informed when a potential employer is going to reject you from a job because of something in your credit report. And, you must be given time to respond after you receive a notice before an employer takes an adverse action. Employers who are going to take an adverse action also need to provide the name of the credit reporting agency and explain you have a right to a free copy of your credit report within 30 days.
Discrimination on the basis of bankruptcy is also unlawful. And, many states impose additional limitations on how information from credit reports can be used. Still, the fact that your credit can affect your job prospects means it's worth paying attention to.
While you may have plans to be debt free for life, the fact your credit score is used for so many other things shows why it's essential that you work on building good credit. By using credit responsibly and paying your bills on time, you can earn a good score and many financial transactions you enter into will be much easier because of it.
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