Okay, so maybe you pay cash for everything, use a debit card and don't even have a credit card. You laugh at your bad credit rating.
But one's creditworthiness, as reflected in a FICO score or a credit report, now affects a lot more than the ability to borrow money or buy something on credit. It can affect whether you get a job, what you pay for insurance, and even how your personal relationships work out.
You may think that the current economic mess and mortgage foreclosure crisis generating an overall decline in credit scores will lower the bar for you compared with others. Think again. Low credit score or not, your credit score can affect you on many new fronts.
Although there are different varieties of credit scores, the most widely used one is called FICO, named for its inventor, Fair Isaac Corp (NYSE: FICO - News). It considers such factors as credit account payment history and borrowing capacity—but not age, income or net worth—to calculate a single number called a FICO score. It can range from 300 to 850. Anything above 750 is considered excellent. Below 550 is trouble.
A credit rating is drawn from a credit report, a compilation by a credit reporting agency of your debts, payment history and other information such as employment and addresses.
At its heart, a credit score is nothing but a mathematical prediction of your ability to pay your debts. But it can also impact other areas that may not be as obvious.
It's legal under the Fair Credit Reporting Act for a would-be employer to look (with your permission) at your credit report and reasonably use that in the hiring or non-hiring decision. Employment consultants say a troubling credit score may cause hiring officers to more closely question an applicant. Vic Tanon, chief simplicity officer at Emplicity, an organization that consults in hiring practices across the U.S., says a bad credit rating is likely to be more of a factor in certain industries like financial services.
There is also advice out there that two people contemplating a permanent relationship should consider credit issues. "Sitting down and looking at each other's credit reports and seeing what that says about each other is an important step before getting married," says Lisa J.B. Peterson of Lantern Financial, a Boston financial planning group. "Risky versus debt-averse personality types that show up in credit scores may paint a pretty good picture of how each person will act in the marriage. It comes down to communication, but that can be really challenging if the personalities are so different."
New York City matrimonial lawyer Sheila Riesel says one of the main concerns with poor credit scores prior to marriage is what it says about the borrower's behavior with credit. People often wait too long to discuss these issues, and it ends up adding to one or another's stake of assets in a divorce settlement. "People's actions impact the way that assets are divided in a divorce," she says.
One detrimental effect of the bank crisis three years ago is tightened credit standards among regional banks have reduced access to capital for small businesses. Today a bad credit score can make it even harder to get bank financing for starting or expanding a business. "A credit score figures more heavily today in an individual's ability to finance a business than it did five years ago when banks had more freedom to lend," says Giovanni Coratolo, vice president of business policy for the U.S. Chamber of Commerce.
Financing a home continues to be impacted by a borrower's credit history. With the new laws passed in the Dodd-Frank financial overhaul bill last year, the holder of a low credit score is really shut out of the market today unless a large down payment can be ponied up.
Federal law also allows landlords to use credit data in making a decision on whether to rent you an apartment.
The methodology behind FICO's credit scores is available on myfico.com. Fair Isaac says its scores allow faster approvals and more credit available at lower rates for many borrowers. The company also encourages people to actively correct their credit agency reports by contacting FICO along with the organization that provided the information to fix mistakes, or by spending time making regular payments on credit to establish an improved credit history.
Fair Isaac does not recommend laughing.
In the old days, a bad credit score or report simply stopped you from buying something with borrowed money at a low rate. That's still true, but times have changed. Credit has become a factor in a much wider range of human endeavors. Here are five ways a bad credit score can affect more than your credit:
Personal Relationships
Engagements have been known to end over one fiance's displeasure with the credit score/report of another. It's one thing to marry for love, but quite another thing to marry for debt. In a divorce, those credit scores can be used as leverage in dividing a couple's assets.
Getting a Mortgage
This traditional use of credit scores for buying a home with a loan is still among the most prevalent. The large number of home foreclosures calls into question whether lenders gave borrowers' credit scores the proper weight in the first place, but new rules are forcing a focus on creditworthiness.
Getting a Job
It is legal for would-be employers with your permission to look at your credit report and use that as part of the hiring decision. If you are denied a job because of a negative report, you must be told about that. There's a push to outlaw employer use of credit reports.
Car Insurance
Some car insurers think there is a direct correlation between one's creditworthiness and propensity to be in an auto accident, so they calculate their own version of a credit score. They put more emphasis on on-time payments than the overall amount of debt, using adverse results to deny coverage or jack up rates. This is illegal in some states.
Property Insurance
Much like car coverage, insurers offering homeowner insurance see a connection between low credit scores and high claims. They perhaps think the less cash-flush have a larger motive to file dubious claims.
