A Bad Credit Score's Nasty Surprises
"We have a lot more clients these days who are interested in finding out more about their credit score," says Kristen Schell, credit building manager at nonprofit financial-services group Justine Petersen in St. Louis. That's because it's not only banks and other lenders who can pull your credit report.
"A lot of [our clients] are being turned down trying to rent an apartment," Schell tells WalletPop. "They get denied because of their credit. It could be anything from having a utility bill in collections or having a low score."These days, it's not uncommon for landlords and utility companies to do a credit check before renting an apartment to you or agreeing to switch on the juice.
Why? Real estate professionals point out that it's very hard to evict someone; even tenants who don't pay their rent for months on end are protected for a while, so a landlord wants to make sure they're not going to lose money and undertake a lengthy court battle by renting to someone who has a habit of not paying bills.
Likewise, utility companies want to avoid the bad PR of switching off someone's heat or electricity in the dead of winter, but they also want to get paid. People with bad credit may be asked by the landlord or building manager to pay a higher deposit, which will be stipulated in their contract.
Another unexpected place where your credit can come back to haunt you is in the rates you pay for car insurance.
"In certain states ... they look at a person's credit to help determine risk, because insurance is all about risk," says Mechel Glass, director of education at credit counseling agency CredAbility in Atlanta. If you have trouble paying your bills, the computer programs that insurance companies use will flag you as a higher risk and charge accordingly. (To find out if this is legal where you live, contact your state's department of insurance and ask.)
When it comes to the cost of personal transportation, Schell says, your credit actually affects you twice. "If someone has a low score: first, they're going to be paying more for a car loan, and then they'll be paying a higher premium for insurance." Schell says that many of her clients struggle with the burden of a low credit score as a result. "It's not only affecting their credit score, but it's also affecting their budget," she explains.
One final way that your credit can impact your life is the role it plays in your employability. It sounds like a double-edged sword: Employers can (with your permission) pull your credit report, but if you've been out of work for months, your credit might have suffered because of your loss of income. A few states -- Hawaii, Washington and Oregon -- only permit a would-be employer to look at your credit report if it's pertinent to the job for which you're applying. But the other 47 states will let any employer take a peek at your credit report.
While this might sound scary, especially if you've been out of work and your credit has taken a hit, it's not a guarantee that you won't get a job because of a few late bills, says Larry Lambeth. Lambeth is president of Spokane, Wash.-based Employment Screening Services, one of the biggest privately-held screening companies in the country. Lambeth says that, contrary to popular belief, he's not hired to deep-six the application of everyone who's ever missed a credit card payment. "They don't pull the credit until they're done doing interviews and have decided this is a person we want for the job.
"They're not looking for a reason not to hire them," he points out. "Everybody says if employers see something bad, they reject you, and that's not the case."
Lambeth says credit reports are also useful because they reveal things that a job applicant might have tried to hide. "They'll say they've lived in California all their life, but you find a New York address," he says by way of example. This is important when it comes to background checks, says Lambeth. "When you're looking at criminal records, there's no such thing as a national criminal database." Finding an undisclosed address like that could give the company a heads-up that they need to do a criminal background check on the "hidden" address.
Lambeth says that the report can also raise other red flags about the applicant's honesty. For instance, if they say their credit is troubled because they've been out of work for six months, a look at their credit might show they've actually had trouble paying their bills for much longer.
The bottom line is, it's your credit, so none of what's in the report should be a surprise. If you anticipate moving, switching car insurance or looking for a job, pull your credit report first so that you'll know what's in there and aren't surprised by a negative report or an error that drags down your score. Go to annualcreditreport.com for a free report.
The scoring model allows you to include a 100-word statement; it won't change the score itself and probably won't help if your creditworthiness is ranked by a computer. But if there's a real person doing the legwork, it could go a long way toward explaining away a score that's fallen due to circumstances beyond your control, like job loss or medical bills.
So what can you do if you have poor credit that you believe may have led to your not getting a job or an apartment, or is the reason that you're paying more than your neighbors for car insurance? First, Schell says, work on rebuilding your credit. Make your payments on time, make more than the minimum payment if you can afford it, and clear up any collections currently on your report. (Take a look at this credit score article for other tips on how to raise it.)
If you're having trouble paying bills, says Glass, don't wait until you fall behind or get sent to collections. Be proactive and get in touch with your creditors. As your score improves, it's worth going back to providers like your car insurance company to see if they'll give you a lower rate for your higher score. If not, shop around for a better deal.
Yes, your credit score can hurt you in more ways than you might expect, but the flip side is that it can help you in ways you might not have anticipated.