As a financial counselor who specializes in bankruptcy services, I often hear people exclaim they will NEVER use credit again once their bankruptcy filing is completed. They have grown accustomed to living on cash, and reject the notion of using credit since it ultimately led to financial crisis. These people may have overspent by using credit and the last thing they want is the temptation to take on new debts.
So, is that a good plan or are these people doomed to struggle in an economic climate that worships consumerism? As with most things, the answer is it depends based on how you use credit and your specific financial goals.
What is a credit score?
A credit score is a number that summarizes your credit history. Its purpose is to help lenders determine if you are a good or bad credit risk. Although each credit bureau has a different way of calculating your credit scores, they generally use the following factors:
- Your payment history – meaning do you pay your bills on time
- How much money you currently owe for loans, credit cards, and other debts
- How long your accounts have been open
- The different types of credit you use
- The amount of credit available compared to how much you owe
- How often you use credit and how recently
Why are credit scores important?
For those of us who use credit, a high credit score rewards the consumer with better interest rates, fees, and other terms on loans or credit cards. In other words, you will pay less for a mortgage, auto loan, and the privilege of using credit cards.
A high credit score can be fruitful in other ways. For example, it may be easier to find rental housing, secure a new job, or better insurance rates for your home and car. The reason for this is many landlords, prospective employers, and insurance companies review your credit report to determine if you are a good credit risk.
On the other hand a low credit score, or no score at all, leads to higher interest rates and fees, meaning you will pay more to use credit. This assumes a lender will actually give you credit, and with tighter lending standards these days, there are no guarantees. Low credit scores may also make it more difficult to find housing, a decent job, and affordable insurance rates.
HOW TO MOVE FORWARD WITH A LOW CREDIT SCORE:
Renting an apartment
Many landlords run a credit check when you apply for rental housing. A low credit score, a bankruptcy filing, or a mountain of debt can surely make a landlord pause when considering your housing application. But that does not necessarily mean you will never find new housing.
No matter what, always put your best foot forward! Sometimes, just explaining your situation and what led to the financial chaos may be enough to sway a landlord in your favor.
Keep in mind that most landlords just want to know you will pay your rent on time. Explain your job history and provide income verification. You may also want to offer paying 2 months’ rent plus a damage deposit to seal the deal. This requires saving in advance and being prepared to pay out big bucks for a new rental.
Another proven strategy is to get a letter of recommendation from your current landlord detailing your stellar rental history. Positive comments about paying the rent on time, being responsible, and a good neighbor may persuade a new landlord that you are worth the risk.
Buying a car
ALWAYS confine your search to the used car market to get the most bang for your car-buying buck. New cars lose value by thousands of dollars as soon as you drive one off the lot.
ALWAYS save a large down payment to reduce the loan balance and minimize the payment amounts so they are the most affordable.
The BEST approach is to save enough cash to pay for a car outright to avoid any car payments. If your credit score is really low, this may be your only option as you may be unable to get financing to buy a car. Also, beware of car dealerships that say “no credit, no problem.” They may be willing to sell you a car but will likely charge enormous interest rates and fees in exchange for your business. If you are considering one of these dealers, contact your state Attorney General’s Office or the Better Business Bureau to make sure you are dealing with a reputable business.
Buying a house
Most of us will never be able to save enough money to buy a home without a mortgage. To qualify for the best mortgage, you may want to first take the time to rebuild your credit. Keep in mind you can also use this time more effectively to save a substantial down payment which can surely help you qualify for a more affordable mortgage.
So the answer to the question: “Does my credit score really matter if I don’t use credit?” is more than likely yes – since having good or bad credit can affect many aspects of our lives. Want information about improving credit? Read “How to Improve, Maintain, and Protect Your Credit Score.”
It’s never too late to take charge of your finances and improve your financial future.
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