Now or in the future, which of the following do you hope to purchase?
- An automobile
- A home
- A post-secondary education
- All of the above
- None of the above
If you answered a, b, c or d, chances are you will one day (if not already) request the use of credit to assist in purchasing one of these expensive items. If you answered with e, well then, um, let’s just hope you didn’t answer with e…
When credit is requested from a lender (to purchase any of the above items and more), credit history is used to decide whether or not to grant that person credit. As we discussed earlier, the lender may look at either a credit report and/or a credit score to determine this. If a person has a negative credit history, or no credit history, they may not be able to obtain credit. Why? Well, let’s use the recurring example of your irresponsible friend that always asks to borrow cash. If you knew that he/she wouldn’t pay it back on time, would you continue to let him/her borrow it? Probably not. Or, if you were unsure that they would pay it back (meaning they don’t have credit history) would you let them borrow it? You might let them borrow $20, but you certainly wouldn’t let them purchase a house from you. Make sense?
In addition, a person’s credit history helps a lender determine the terms of credit granted, which could include the interest rate paid and length of the loan. Over a lifetime, a person will pay more for credit (in higher interest rates and fees) if they have a lower credit score. The table below illustrates that if you have a lower credit score you will have a higher interest rate which leads to a higher monthly payment.
| This is based upon a 30-year fixed mortgage rate for a $300,000 loan | |||
| Credit Score (FICO) | Interest Rate Granted | Monthly Payment Made | Total Amount Paid for Credit (30 years) |
| 760 | 5.9% | $1,787 | $643,320 |
| 650 | 7.2% | $2,047 | $736,920 |
| 590 | 9.3% | $2,500 | $900,000 |
Note: As your credit score decreases, your interest rate increases.
A person’s credit history affects their ability to obtain credit and the terms of credit granted, but would you believe that credit history can also affect parts of your life that are not related to receiving credit? The truth is, more than potential lenders check a person’s credit history.
- Insurance companies may use the information to decide whether you can get insurance and to set the rates you will pay
- Employers may use your credit report, if you give them permission to do so, to decide whether to hire you
- Telephone and utility companies may use information in your credit report to decide whether to provide services to you
- Landlords may use the information to determine whether to rent an apartment to you
Basically, your credit history is important because lenders, insurers, employers, and others may use it to assess how you manage financial responsibilities. Wait, so we’re telling you that if you have a negative credit history, you could be without insurance or utilities, unemployed and HOMELESS? Now do you understand how important it is to have a positive credit history? Since it is so important, please remember the following about the importance of credit history:
- Your credit history determines your ability to obtain credit.
- Your credit history determines the terms of credit granted, such as the interest rate you will pay.
- Your credit history affects much more than your ability to receive credit. Credit history can affect your ability to obtain a job, rent a place to live, and obtain utility services.
