How Your Credit Can Influence Your Purchasing Power

Before you can swipe, you need a lender to grant you a credit card.

Before you can swipe, you need a lender to grant you a credit card.

Your credit score may be just three digits, but those digits can have a huge impact on your purchasing power, especially when it comes to big-ticket items. Any time you want to buy on credit, whether a mortgage, car loan or even just applying for a credit card, the lender wants to know what your credit looks like.

Lenders Check Credit Scores

Credit scoring helps lenders get a quick picture of how you've handled your debt in the past. The better your score, the less risk you pose to the lender. Credit scoring also helps you as a borrower because your score is transferable from one location to another. For example, if your company transfers you from Dallas to Detroit, no lenders in Detroit have worked with you before. However, when you go to apply for credit, the Detroit lenders can see that you're a reliable borrower (or not) based on how you handled your debts while you lived in Dallas.

Lower Credit Limits

When you apply for a credit card, the credit card company pulls your credit score to see how you've done handling credit in the past. If the company sees a lower score, you might still manage to be approved, but with a much lower credit limit. For example, instead of a $5,000 or $10,000 credit limit, you might be stuck with a $1,000 or $2,000 credit limit. If you're planning to make a bigger purchase, you might have to pay for some of it with cash so as not to go over your limit.

Higher Interest Rates

When you apply for an installment loan, the interest rate plays a significant role in how much you pay each month. With larger loans, such as a mortgage, this can drastically impact how much you can afford to borrow. For example, if you have stellar credit and get a 4 percent interest rate on your 30-year mortgage, the monthly payment would be only $716.12. Alternatively, if your credit is worse and you have to pay 9 percent, your monthly payment jumps to $1,206.93.

Denial

If your credit makes you too risky of a borrower, your creditor may simply deny your application for a credit card, personal loan or mortgage. This might not affect your ability to buy daily necessities like groceries. However, any time you want to make a larger purchase, such as new furniture, a car or a house, you'll have to have money saved up to pay for the entire cost or at least make a large enough downpayment that the lender feels lowers the risk of lending to you.

 

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