Good Credit Pays
Tenant Tip #13
You have all heard about credit “scores” and how important they are. Think of them like grades in school… basically the financial world ranks you on a scale based upon how likely you are to re-pay bills.
So, if for example you pay your bills, timely, your score goes up. Pay late, and your score goes down. Manage to carry more than 1 credit card, and pay both timely, your score goes up, inability to manage multiple cards, and your score goes down.
Carrying multiple financial obligations (car loan, credit card, card #2, etc.) shows financial strength. Failing to pay anything on time shows financial weakness.
The above is a boiled down example, but it’s meant to show how certain facts/factors can improve or lower your credit score. The big three credit agencies actually look at many, many individual factors and they plug that raw data into a scientific formula of sorts. At the end of it all you, me and everyone who enters the financial world are assigned a credit score based on these facts.
Does this matter to you? YOU BET!
For tenants, it can affect you in several ways. Let’s consider just a couple:
1. Finding a new apartment. Many property owners and managers rely on tenant screening services to find good tenants, and identify potential problematic tenants, including those who might fail to pay, or who have prior evictions. As they review applicants, owners will often secure your credit report and can assess your credit score.
Do you think they like low scores, or high scores? Of course, they understand the higher the score the better for them. At least one major Portland property manager has very specific credit score standard for leasing their property. Those whose scores fall below a certain number are not accepted.
In effect, having a poor score will limit your choices of apartments, and make finding one that much harder.
2. Purchasing a car. All banks use credit scores to make lending decisions. It may not be the sole factor, but it’s a very, very important one to any prudent lender.
Do you think banks prefer to loan money to folks with low credit scores or high? Simple question, simple answer. You know it matters to a bank. And, if the bank agrees to loan you funds to buy that new car, the actual interest rate you pay may be higher or lower based on your score.
Consider that last point. Banks do not charge uniform interest rates. One person might get their car loan at 4.95% while someone else pays 5.50% for the same money, to buy the same type of car.
Why? Because the two folks have two different credit scores, and one person poses more of a risk that the loan will default, and so their loan gets priced higher!
Having a low credit score can mean the difference to you between a car payment of 305/month, and a car payment of 395/month. What could you do with an extra 90/month or an additional $5400 over the course of typical 5 year car loan?
3. Moving into your first home, condo. That’s right. Someday you will want to own your home or condo. It matters here as well. Banks will loan based on your credit score.
No one said it’s fair, or perfect, but it’s the system used by today’s financial world. Heck, corporations, and even countries get credit ratings, and their loans as well get risk priced. So, it’s a fact of life these days.
Knowing that, you simply have to choose ways to improve your score, and avoid acts that injure your score. In the long run, this will save you big, big dollars…
Tim Murphy
Padzilla.Com
December 15th, 2009 at 11:38 am
[...] time, I stressed how important a good credit score can be. Basically, the better your credit score, the better price for loans/credit. More goods and [...]