Building Good Credit (for your next loan) Is Like Building A Good Resume (for your next job)
To understand how credit reports work, think about managing your credit history like you manage your career.
6 Consequences Of Bad Credit
- Higher interest rates. A bad credit score puts you in a high-risk category. To protect themselves from possible loan default, lenders have to charge a higher interest rate.
- High security deposits. Renting an apartment with bad credit usually means you'll be paying a higher security deposit or even several month's rent in advance.
- Business loan denial. Starting your own business is hard enough with good credit. With bad credit, it can be difficult or impossible to get a business loan.
- Expensive cell phone service. Cell phone providers can insist that you enroll in a month-by-month contract instead of a one or two-year contract.
- Car loan problems. You can get a car loan with bad credit, but the interest rates will be much higher than those charged to car buyers with good credit.
- Higher overall expenses. Basically, everything costs more when you have a bad credit score. Consequently, it becomes even more challenging to clear your debts and begin rebuilding your credit history.
There's definitely something mysterious about credit reports. This detailed account of your personal finances is maintained and interpreted by three separate credit agencies (Experian, TransUnion and Equifax ). You're only entitled to a free credit report from each agency once a year. But banks, credit card companies, mortgage brokers, landlords and others can get a copy of your credit report whenever they want.
Adding to the mystery surrounding your credit report is the proprietary formula that each credit rating agency uses to calculate your credit score. People who access their credit scores on credit monitoring websites like FreeScoresAndMore.com discover that the scores they get from each agency are usually different. There are a number of reasons for these discrepancies. For one thing, the three credit bureaus don't always receive identical information. It's also possible for one bureau to have more up-to-date information than another. Yet another variable is the way that Experian, TransUnion and Equifax store and record the credit details they receive.
Just because you don't have everyday access to your credit report doesn't mean you have to be in the dark about the role your credit history plays in your everyday affairs.
One way to increase your understanding of credit history and credit scores is to equate these details with your career and your employment history. For example:
- It's easier to get a job when you already have one. As any career counselor knows, your chances of landing a new job are much higher if you're already working. Being gainfully employed may be proof that you're a reliable, valued worker. Likewise, it takes debts to build good credit. A good credit score isn't the result of zero debt; it results from having debts that you repay on time or ahead of schedule.
- One bad recommendation (or debt) can do a lot of damage. An impressive resume enables you to rise above your competitors in the job market. But a single bad recommendation from a former supervisor or coworker can take you out of the running. Your credit score can be equally vulnerable to a single issue -in this case, a bad debt. And while you can easily edit your resume to exclude potentially detrimental contacts and details, bad debts can't be easily excised from your credit history. Sometimes only time and ongoing good behavior can eventually overcome the negative effects of bad debts.
- Employers sometimes like risk takers, but creditors never do. An ambitious professional might describe himself or herself as a risk taker with the knowledge that this quality is viewed in a positive light by prospective employers. But banks, mortgage brokers, and other lenders have a strong aversion to risk. The qualities that can enable someone to ace a job interview -self confidence, attractive appearance, positive attitude, etc.-are rarely compelling enough to overcome a poor credit score. Scoring a low rate on a car loan or getting a mortgage doesn't require charisma. What really matters is what's on your credit report.