Credit is like an invisible shadow that follows each of us around throughout our lives. For those who have good credit, it’s easy not to pay attention to the shadow; it’s simply present in the background and not noticeable unless you’re actively seeking a loan or applying for a credit card. On the other hand, for those with bad credit or no credit, it can seem like an omnipresent force that presides over every aspect of life. While that isn’t necessarily true, credit affects a surprising number of aspects in our day-to-day lives. Continue reading as we talk about credit reports and the extensive influence they have over our lives.
A brief history of credit reports
In order to understand how credit affects our lives today, it’s helpful to take a look at the history of credit reports themselves. While the concept of credit is way older than credit reports, lenders and creditors throughout the ages have always wanted a means of vetting potential borrowers. This was mostly done on a person-to-person basis (e.g., a borrower would have reputable people in town vouch for them), but in the mid-19th century, some lenders began the practices that would lead to the modern credit system. By the early 20th century, some of the predecessors to organizations we’d recognize today, like Equifax, already existed.
A key feature of this system was open access to information for creditors, as well as the assumed accuracy and completeness of the information. From their inception, credit reports were designed to provide something of a character portrait on individual borrowers, although as the industry progressed, it moved toward more quantitative analyses such as the FICO scoring system. With the Fair Credit Reporting Act (FCRA) of 1970, a dimension of transparency was added to the system, so that consumers could have protections regarding the information contained in their reports. Over time, credit reports have become one of the cornerstones of American’s lives – in more ways than you probably realize.
What areas of your life can credit impact?
What the history of credit reports reveals is that, while credit reports are predominately used for lending evaluations, in a lot of people’s minds character and credit are connected. It’s not difficult to see why in today’s world, credit reports can affect matters well outside the realms of borrowing and using credit. Here are six aspects of your everyday life that credit affects:
Housing. You probably realize that home ownership requires good credit, given that most people need to secure mortgages to cover the cost of buying a home. But the landlords of apartments and other rental units also check applicants’ credit. While not every landlord does this, it’s a common enough practice that most tenants should simply be prepared for it. On the plus side, credit can work the other way, too, when it comes to housing. If you pay your credit-related bills or mortgage on time, your credit scores may be positively impacted by this information.
Employment. In addition to requesting references from friends and colleagues, some employers might run credit checks or background checks when you apply for a job. This is especially common for roles that involve handling money or making financial decisions in any capacity, so you should be prepared for the possibility depending on what field you’re hoping to work in.
Insurance. Insurance services, especially home and auto insurance, partly rely on something known as an insurance score. This score is a metric that correlates your credit scores to your insurability or your risk to your insurer. Bad credit scores won’t necessarily prevent you from getting insurance, but they will make your premiums much higher. Conversely, having good credit scores can go a long way to reducing the cost of your insurance.
Banking access. Although banks typically look at your banking history at other institutions, through platforms like ChexSystems and Early Warning Services, when deciding to provide you with a new checking or savings account, some banks might decide to evaluate your credit reports in addition to (or instead of) your banking history. Since banks have the option to check your credit reports, you will want to be prepared and know what’s on your credit reports before you try to open a new bank account.
Utility companies. You might not be aware, but in many cases, cell phone and utility services (e.g., gas and electric companies) look at your credit in order to determine how reliable a customer you’ll be. Bad credit won’t necessarily prevent you from getting service, but you’ll likely have to provide a deposit to the utility provider before being able to open an account with them. These deposits are gauged based on your credit, and they can be on the steep side, which could serve as a nasty shock when you attempt to get new service.
Your love life. Yes, even cupid cares about your credit. Not only does credit affect your post-wedding finances, but it could affect your chances in the dating game as well, given that a lot of single people consider good credit an important characteristic in a partner. This goes double for those with a divorce under their belt, as it can negatively impact your credit.
How can you deal with the effects of bad credit?
If you have bad credit, it’s very likely that it’s impacted your life in some of the ways discussed above. Even worse, some of these negative effects, like increased insurance premiums and higher loan interest rates, can increase your financial burdens and contribute to a cycle of bad credit.
One of the most important things you can do to help yourself is to take a look at your credit reports. Even if you know you have bad credit, it’s possible that credit report errors could be unfairly dragging your credit scores down even further. For example, you may have been the victim of identity theft and not even realize it. Looking at your report will also help you come up with a credit improvement strategy and decide on what actions to take to start rebuilding. For example, a secure credit card is a useful tool to help you improve your credit (with responsible use of the card), since most report timely payment behavior to all three credit bureaus. If you need assistance with improving your credit, hiring a credit repair service to help can may also be a smart move.
Ultimately, credit reports and scores are a part of our lives, and everyone’s individual situation is personal and unique to them. Keep in mind, the longer you wait to take action, the longer you might continue to experience the negative effects of bad credit. On the other hand, if your credit is in good shape, you can work on keeping it healthy for years to come, as credit is important throughout your whole life — even after retirement.
For more information about credit and credit reports, keep reading our credit monitoring blog.