This is a guest post from one of the readers, who wants to be anonymous.
Having a good credit score wasn’t always on the top of my priority list when I was in my early 20s. I never had an immaculate score, but it also wasn’t too shabby. I could have access to almost any type of financing: credit cards, car loans, and even a mortgage. I always paid my bills on time but I typically carried over some of the balance to the next month.
Fast forward a few years later, I had some hiccups when it came to paying my bills on time. With the limited amount of money I had left, I had to quickly prioritize which bills got paid first: rent, car loan, insurance, and then credit cards.
To make a long story short, I ended up defaulting on my credit cards and my student loans. I started out being 30 days late and it quickly spiraled out of control.
I had to learn the hard way that I had to be more proactive to protect my credit score. It was a complete nightmare trying to rebuild my credit over the next few years, but what I learned from this is how important it is to have a good credit score.
Over the next few years of my life, I was faced with challenges of getting a credit card, a personal loan, and an auto loan. Here’s how my poor credit affected my application process.
Applying for a Standard Credit Card
Your credit score is a three-digit number that tells lenders how likely you are to default on a loan. The lower your credit score, lenders are taking on more risk. You’ll quickly find that lower credit scores will logically come with higher interest rates.
After finally getting all my old debts paid off, I decided that it’s finally time to apply for credit cards to rebuild my credit score. Every creditor I applied to rejected my application. With each application came hard inquiries on my credit report that dragged it down even further.
I thought to myself, “How can I rebuild my credit score if I can’t even prove that I can repay the loan?”
At this point, I had no choice to apply for a secured credit card. A secured credit card is protected by a deposit that you’ll have to pay upfront that establishes your credit line. So for example, if you want a $500 credit limit, you’re going to have to pay $500 to securitize your card.
The interest rate was sky high- 27.99%. I made a promise to myself that I would pay off the balance each month and never let it take control of me.
Here’s a quick example of what a 27.99% interest rate looks like on a credit card:
If you have a $2,000 balance and you’re paying $60/month, it’ll take you 66 months to pay it off. You’ll also end up paying roughly $1,900 in interest. Now on the other hand, if you have a 9.99% interest rate and you’re paying $60/month, it’ll take you 40 months to pay it off while only paying roughly $350 in interest. This is a huge difference you simply can’t ignore and having a good credit score can help you save thousands of dollars in interest.
Obtaining an Auto Loan Was 3x More Difficult
I ended up getting a better job with more pay. It was time to finally upgrade my car I had since college. When I was researching cars, I had a rough idea of what I wanted to spend. I didn’t want my monthly payments to exceed $250/month.
What I found was that most auto dealerships make most of their money from the financing itself (not selling the car). When I was going through my financing options, I was shocked at the interest rate they were quoting me.
My plan was to borrow roughly $12,000 for a loan after putting about 10% down for a car. With a loan amount of $12,000 with an interest rate of 11% for 60 months, you’ll end up paying $261/month. Now imagine if you had a good credit score and qualified for a reasonable 4% interest rate. Your payments would be $221/month.
I tried to shop this around to other lenders but it seemed impossible. Some lenders even quoted me up to 15% on an auto loan. I ultimately decided to just go with the dealership financing and then refinance the loan in the future.
See the difference here? Your credit score goes a long way when it comes to obtaining financing. It should never be ignored.
So What Exactly is a Good Credit Score?
Now I bet you’re all wondering what my credit score was when I applied for a credit card & an auto loan. To tell you the truth, I don’t quite remember but it was under 580 when I applied for a secured credit card and around 640 when I applied for an auto loan.
Getting a secured credit card is probably one of the best ways to rebuild your credit score. They usually have a very low credit score requirement since you have to put an initial deposit to establish your credit line.
A good credit score is typically above 680, but keep in mind that all lenders use various credit models to determine your creditworthiness.
In addition, a good credit score is different for every single purpose: buying a home, getting a new car, applying for a personal loan, and even a credit card.
What Can I Do To Get Improve My Credit Score?
My biggest advice for getting a good credit score is to create good financial habits. We all know that your payment history is the single most important factor, but what many people don’t know is that your payment habits are a product of your everyday financial habits.
In addition, you can always get a secured credit card to help you improve your score. This is one of the most sure-fire ways to improve it.
You should always ask yourself:
- Am I saving enough money for an emergency fund?
- Am I constantly checking my credit card balance to make sure I’m not overspending?
- Am I creating and sticking to a realistic monthly budget?
- Am I spending money on things that I really shouldn’t be?
- And most importantly, am I thinking about the future and how my credit score will impact it….
It’s okay if you had a few hiccups in the past. The most important thing is to always remember how important your credit score is. You might not need it today, but you’ll definitely need it tomorrow. Learn from my mistakes and try to get into the habit of always being on top of your score.
Readers, share your stories and let us know how your credit score helped or hamper your financial progress