You and Your Financial Shadow - Why Your Credit History Matters

Imagine your excitement when you decide to finally buy your first home.  You had a rough start right after college, but after getting a great job you saved for a few years and managed to put aside enough money to make a sizeable down payment on a home.  It's a buyer's market and inventory is abundant.  You have researched your local housing market and know you can negotiate a great deal on a property that meets your needs.  You have planned and you have thought of everything.  No problem, right?

Your realtor eventually finds your dream property and you want to make an offer, but the sellers say you need financing pre-approval before they will entertain your bid.  When you hear back from your bank, your excitement quickly turns to anguish.  The bank informs you it won't approve your loan request because your credit score is too low.

Despite all of your planning, you forgot one important consideration.  Your credit score and credit history have been your financial shadows.  They have followed you everywhere.  You never considered that those missed and late credit card payments from three years ago would come back to haunt you.  It is a mistake that is all too common - failure to understand the real importance of your credit history.

Your credit report is a detailed history of your credit information. It contains identifying information, current financial and credit information, credit card and loan balances, the number and age of available credit lines, delinquent payments, bankruptcies, the length of your credit history and credit inquiries.  Your credit score is a three-digit number that is based on an analysis of the information contained in your credit report.  The score is derived from a mathematical formula that takes into account all of your credit information, with some factors weighted more heavily than others.  The leading credit score in the industry is FICO and FICO scores range from 300 to 850.  A high numerical score is great news.  A low score can impact you negatively.

Negative notations, such as overdue or unpaid accounts, can remain on your credit report for up to seven years. Bankruptcies can remain in your file for up to ten years.  In addition, when credit scores are reviewed in connection with applications for certain types of high paying jobs or certain levels of credit or life insurance, negative items can impact your credit even longer than that.

On the insurance side, premiums are determined by an overall "insurance score", which takes into account your credit score.  If your credit score is on the low side, an insurance company will likely raise your premiums.  Maintain a high credit score and you will likely be entitled to discounts on your premiums.

Prospective employers are increasingly checking the credit history of applicants for employment.  While some argue that a person's credit history provides some indication of responsibility and trustworthiness, this practice is not without its critics.  Sometimes a poor credit history can be the result of events, such as a divorce or health crisis, that have  no bearing on a person's capacity for honest and responsible conduct on the job.

As noted in the homebuyer scenario, a bad credit score can easily disqualify you from getting a loan to buy a home or other major purchase.  Or, if you can get a loan, you may be required to pay a higher rate of interest because you are judged to be less creditworthy by the lender.  Often, people with poor credit feel they have no choice other than to turn to more unconventional loan products and that is when they can become vulnerable to predatory lending practices.  A credit report with dings can also result in denial of a rental application if you plan to rent a home or apartment. 

Given the potential for your credit history to impact major life decisions and opportunities, it is important to keep close tabs on your credit report.  Identity theft and errors in your credit file can damage your credit rating if you don't catch them early.  Always review your report to make sure the information is complete and correct.  You can even subscribe to services that will alert you whenever there is a change to or inquiry about your credit report.  It is important to make sure that your file contains accurate information and makes a positive statement about your sense of responsibility, trustworthiness and creditworthiness. The key is just to stay on top of it.

Also keep in mind that, if you are denied credit, employment, rental housing, or insurance based on your credit report, you have the right to obtain a free report from the agency that supplied the information within 60 days of the denial.

Your credit score is a vital evaluation tool not only when it comes to being approved for loans, but for many other aspects of your personal finances and your life.  What your credit history says about you can make the difference between having opportunities and losing out on them.  That is why becoming an expert in your own credit history will pay dividends to you for the rest of your life.