Wondering how credit scores can affect your life? Well, it can be more important than you think. Your credit score can be the deciding factor between the types of loans you get, your interest rates, or whether you can secure a mortgage for your dream home.
Having a good credit score can set you up for better opportunities in life, while bad credit can make things more challenging, especially for some crucial life choices. At the end of this article, you'll be able to answer the question, "how does a credit score impact your life?" and what your options are.
What is a Credit Score?
A credit score is a three-digit number representing your creditworthiness; that is, how likely you are to repay a loan on time. Lenders use this score to appraise your credit risk and decide whether or not to approve you for a loan in Canada.
Credit bureaus like Equifax and TransUnion analyze data about your overall credit behavior, including your payment history, debt profile, credit utilization, length of credit history, and credit mix. These pieces of information help them to generate your credit file— your credit score is calculated based on this report.
The FICO scoring model is the most common credit-scoring model in Canada. Based on this model, your credit score generally falls between 300 to 850—the higher your score, the better loans you can access. For example, someone with a score of 800 will enjoy loans with lower interest rates and more extended repayment plans.
10 Ways a Credit Score Affects Your Life
1. Credit Scores Affect Your Interest Rate
A good credit score is a vote of confidence for you, and this translates into better loans with lower interest rates. The implication is you'll pay lower charges on credit, and you can spread the repayment over a more extended period. For example, a credit score of 780 can earn you a 3.2% interest rate on a $300,000 mortgage spread over 30 years.
Having a lower credit score means you'll pay higher interest rates, which could make it difficult to stick to a loan repayment schedule. In the end, it can even worsen your debt profile and further affect your creditworthiness in the long term.
Having a good credit score is something everyone should strive for to make the most of their money and credit options. You won’t have to settle for lower loan amounts, pay high-security deposits and outrageous interest rates. Fortunately, there are ways you can get loans even if you don’t have a good credit standing; You can easily learn how to get a poor credit loan.
2. Credit Score Affects Your Chance of Getting a Loan
Instant online lenders are more likely to give out money to people with low credit scores. However, a poor credit score may mean you may not be able to pay back the loan on time. To mitigate this risk, traditional financial institutions would rather lend money to individuals with higher credit scores..
While a good credit score doesn't translate to automatic credit approval, it does give you a better chance of getting the money you want, whether it's a small payday loan, car loan, or student loan. Giving you a confidence boost for your credit applications!
3. Credit Scores Impact Your Credit Limits
A good credit score helps you secure approval for loans with higher limits. Due to your good track record, lenders generally trust you to pay back the money you borrow on time, so they are willing to lend you more.
Typically, financial institutions are skeptical about giving money to people with lower FICO scores. They do not trust you to make on-time payments so, you will only get approvals for loans with lower amounts.
4. Credit Scores Can Impact Your Chance of Getting Approved for an Apartment
People with high credit scores find it easy to secure apartments in Canada. If you have poor credit, you need to meet more requirements before your rent application can be approved. You might have to pay a security deposit or find a cosigner with a better credit score to support your application.
5. Credit Scores Impact Your Insurance Rates
Homeowner or car insurance companies consider your credit score as part of their risk assessment. If your score is low, it can increase your insurance premium rates. People with better credit history have healthier insurance scores and enjoy lower premiums.
6. Credit Scores Can Show How Much of a Risk You Are to Lenders
You might not qualify for a loan if you have a poor credit score. Since reputable financial institutions do not trust your creditworthiness, they are less likely to approve your loan application. You might have to fall back to non-collateral loans when you need money fast.
7. Your Credit Score Can Affect Your Relationship With Utility Providers
Many provincial laws allow utility companies to run background credit checks on their customers. If your credit score is poor, they may ask you to provide a cosigner or request a security deposit before granting you access to their services. A good credit score exempts you from security deposits on utilities.
8. Your Credit Score Can Impact Your Chance of Getting a Job
While your future employer may not have access to your exact credit score, they can evaluate your credit reports as part of their hiring process with your permission. Having good credit leaves a positive impression on the hiring panel, influencing their decision one way or the other.
9. Your Credit Score Will Determine if You Get Credit Card Rewards
There are a lot of credit card rewards you can benefit from with a good credit history. These include juicy cashback, fantastic welcome offers, and invitations to exclusive events. People who have poor credit may miss out on these great incentives.
10. Your Credit Score Can Determine if You Can Get a Mortgage for Your Dream Home
Your poor credit score can be the stumbling block preventing you from securing a mortgage for your dream home. Mortgage lenders consider bad credit scores as high-risk, so they are less likely to approve applications from people in this category. A good credit score of 750 or more sets you up for better mortgage offers with lower interest rates.
Alternatively, there are ways you can recover your credit over time. Learn how to improve your credit scores and access better lending opportunities.