How Does Credit Affect Your Life?

Turning 18 comes with a big responsibility. All of a sudden, you’re an adult charged with new responsibilities. One of those responsibilities is building your credit score. You may have to pay higher interest rates on credit cards and auto loans without a credit score, particularly a good one. You might have to pay higher security deposits to rent or lease an apartment or take out a personal loan. Learning how credit affects your life now can set you up for credit success later.

Highlights & Key Takeaways

• Your credit score helps lenders determine your creditworthiness.
• Your credit score can impact many big goals in your life, including your ability to buy a house, buy a car, and qualify for credit cards. 
• While bad credit can hold you back, you can focus on boosting your score to help you achieve your goals. 
• Aiming for a credit score in the good range of 670 to 739 is a great place to start.

What Your Credit Score Means for Your Goals 

When we’re 18, our goals are a bit more simple. Typical goals at this age might include getting into college, graduating from college, starting a career, beginning a serious relationship, finding an apartment, financing a car, etc. And these are big goals that require focus and diligence to achieve. As we get older, we tend to focus on additional goals. Typical lifestyle goals for many include:

• Buying a first home and ditching that old college apartment
• Financing a new car instead of the used one that got you to school and back all those years
• Starting a new relationship
• Getting married
• Having children
• Taking a dream vacation

Though you can achieve some of these goals without a good credit score, that same good credit score can make these goals more affordable. For example, with a good credit score, you can get approved for a higher mortgage at a lower interest rate. This allows you to invest in a nicer home for your family. A good credit score, such as the national average of 714, will help you take out a personal loan for good credit that can help you pay for a family vacation to DisneyWorld, creating a lifetime of memories.

Applying for Credit Cards

The average American has four credit cards. Credit cards are a must-have for most Americans, as they provide an alternative payment option to cash. Considering 70% of Americans are shopping online, and you can’t make a purchase online without a credit card, you’ll likely want to apply for a credit card or two. Credit cards are helpful in an emergency, and when you use them well, they can help you build your credit.

If you have good credit, you can qualify for:

• Lower interest rates
• Higher borrowing limits
• Better perks and rewards

If you have poor or fair credit, such as a score below 669, you won’t get access to the same lucrative offers. 

• You may need to start out with a secured credit card to help you build your credit
• You’ll likely have a lower spending limit which can make it harder to keep your utilization under 30% (more on that later)
• You’ll be charged a higher interest rate
• You’ll have fewer perks and rewards

Applying for Personal Loans

According to Experian, personal loan debt rose in 2021 as more and more consumers looked to take on home improvement projects, fund family vacations, and consolidate their debt. And having a personal loan is not a bad thing. Paying your loan on time each month and managing your debt responsibility is a great way to help you build and improve your credit. But as with credit cards, good credit can give you access to better loans.

If you have good credit, you can access personal loans with:

• Higher borrowing amounts
• More flexibility in how you use your loan funds
• Better interest rates
• Higher chance of qualifying for an unsecured loan

If you have poor credit, however, you may need to get a secured loan (backed by collateral). And if you get approved for a traditional personal loan, you can expect the following:

• Lower borrowing limits
• Less flexibility in how you use your loan funds
• Higher interest rates

Buying a Car

A report from Automotive News indicates that 28.8 million auto loans will be originated in the U.S. in 2023. This is a 5% increase from 2022, and the increase isn’t all that surprising now that workers across the country are heading back to the office. Though you may be able to purchase a new car or new-to-you car with cash, it’s more likely that you’ll want to finance or lease your vehicle.

If you have good credit, you can expect:

• A lower interest rate
• Lower monthly payments
• Less need to provide a down-payment
• Lower cost over the lifetime of your loan

If you have poor credit, on the other hand, you can expect:

• A higher interest rate
• Higher monthly payments
• Inability to finance the vehicle for as long as with good credit
• Higher down-payment requirements
• Higher cost over the lifetime of your loan

Buying a House

According to Statista, the median price of existing homs in the U.S. was $392,000 in the third quarter of 2022. And, the median price for a new construction home in 2023 is $446,000, not including the price of land. If those statistics don’t scream it out for you, let’s lay it on the line; buying a house is expensive. Few people have the cash lying around to fund the purchase of a home. The answer lies in financing. The quality of your credit score, however, can greatly influence how much you’ll pay for the cost of that home over the life of your loan.

If you have good credit, you can expect:

• Ability to finance a more expensive home
• A lower interest rate

With bad credit, you can expect:

• The need for a larger down-payment to get your mortgage to an affordable monthly payment
• A higher interest rate
• Higher likelihood you’ll have to pay mortgage insurance on your loan

Renting an Apartment

Few people purchase a house right off the bat after entering the workforce or graduating from college. It’s far more likely that you’ll want to rent an apartment. Apartments offer a bunch of great perks as you don’t have to worry about yard maintenance, your landlord will take care of major repairs, and you won’t have to pay as much as you might with a mortgage. But your credit score can impact your ability to rent an apartment too.

If you have a good credit score, you’ll look like a more attractive tenant to the landlord. And, you may not need to pay as high of a security deposit.

With poor credit, however, it will be harder to rent an apartment. You may be required to pay a higher security deposit and in some cases, a co-signer, even if that person does not live with you, will be required.

Setting Up Utilities

Whether you purchase a home or rent an apartment, you’ll need to set up utilities. When you call to have your gas, electric, water, and other utilities transferred to your name, the utility company might run a soft credit check to determine your creditworthiness. Though a soft credit check won’t harm your credit score, the information that the utility company obtains can impact your utility costs.

If you have good credit, getting services will be easier and there might not be any unique requirements.

If you have poor credit, you may be required to pay a security deposit. However, if you have poor credit, you might want to sign-up for Experian Boost so that your utility payments can help you improve your credit.

Getting a New Job 

This one might seem a bit out of place, but believe or not, your credit might be pulled when you apply for a new job. If you are applying for a job with the government or the financial sector, it’s almost a guarantee that your potential employer will take a look at what’s on your credit report. But other industries might look too. Employers check your credit report to verify your identity, assess your ability to manage debts and serious responsibilities, and determine your reliability.

If you have a good credit score, this can make a positive impression on your potential employer.

If you have a poor credit score that reflects late payments, however, this could be viewed as a red flag. So, if you do have a poor credit score, be prepared to address any questions about this during the interview process.

Building a Long-Term Relationship

By no means does your credit score, how much you make, or other financial topics come up in a first, or a second, date. But as your relationship becomes more serious, it’s highly likely that these topics will arise. Your partner has the right to know how you manage your finances, especially if discussions of marriage are in the works. Research has shown that your credit score can impact the health of your relationship, too.

If you have a good credit score, it signals the following to your partner:

• You know how to focus and manage your responsibilities
• You can be a contributing financial partner to your relationship
• You know how to stay committed

A poor credit score, can cause contention in your relationship. In fact, money is a leading cause of friction amongst married couples. Moreover, your poor credit score can signal the following:

• You don’t follow-through with your commitments
• Your income is volatile and might not be reliable
• You don’t have the ability to focus and manage your responsibilities

Maintaining Good Credit After Retirement

Deciding to retire, and actually retiring, doesn’t have an affect on your credit score. But, when you retire, you will likely experience a change in your finances that can impact your credit score and your borrowing power. You might not be receiving a check from an employer anymore, and the chances are that your income from social security, pensions, etc., is less than what you used to bring home. This means you need to be that much more careful in paying your bills on time, watching your spending to keep your utilization under 30%, and more.

Maintaining a good credit score during retirement will help you:

• Qualify for good loan terms
• Secure the senior housing you desire
• Help you finance those dream vacations that you have been aspiring for all those years

But if you let that credit score fall south, you may find that you can’t:

• Get a good interest rate on a loan
• Qualify for credit without a security deposit

Good Credit vs. Bad Credit 

Understanding how credit affects your life starts with knowing how to differentiate between good and bad credit. Let’s start by showing you the FICO credit score rankings and how those scores are calculated in the first place. 

As you can see, your credit score will fall somewhere between 300 and 850. And as you know, the average credit score amongst Americans is currently 714, which is a healthy score falling right in the good range. It takes about six months to build your credit score in the first place. From there, it is simply up to you to make wise financial decisions to help that credit score continue to grow and improve. Here is what goes into that credit score.

As you can see, the most important thing you can do is make your payments on time. In fact, failing to make a payment on time and not making it up within 30 days can cause a ding of 180 points to your credit score. The next most important factor is your amounts owed, often referred to as utilization. Your utilization is a calculation of the amount you owe on your credit cards compared to your available credit. The three credit bureaus, Experian, Equifax, and TransUnion, like to see that ratio at 30% or below.

Quite simply, bad credit due to poor financial behaviors can make it more difficult to achieve your goals. Good credit, however, can help give you access to better loan products and credit card offers, making it easier to obtain the things you want.

How to Build Good Credit

It takes some time to build good credit. But, with the right approach, you too can join the ranks of other Americans who are boasting about their good and excellent credit scores. Follow these recommendations and you’ll start to see that credit score grow.

• Make your payments on time, all the time
• Keep your credit utilization under 30%
• Keep your oldest accounts open, even if you don’t have a balance on them
• Only apply for new credit when you need it
• Boost your credit if it is lower than you want by applying for a secured credit card, taking out a credit-builder loan, or becoming an authorized user on someone else’s credit card 
• Be patient - it takes time to build a lengthy credit history

Final Word

Your financial strength is impacted by many things including your income, the amount of debt you have, and how you approach your budget. These things can also impact your credit score. So if you have been wondering how does credit affect your life, you should understand that your credit score can seriously impact your ability to get low interest rates, get borrowing flexibility, and achieve your lifetime goals. If you have poor credit however, it is possible to improve your credit score.