When you open a credit card, loan or lease account, three credit reporting agencies keep track of your credit information. Any time you request a line of credit or insurance, the lender usually pulls your credit report. The creditor will evaluate your payment history, debt-to-income ratio, number of late payments, and types of outstanding debt. If you're a higher credit risk, you will usually end up paying more for whatever you buy on credit.
Your credit score often determines the interest rate that a lender will offer. Credit cards and car loans are two examples of when a lower score will result in a higher interest rate. If you carry your credit card balance over to a new billing period, a higher interest rate means that you will pay more for your purchases. With a higher credit score, you may qualify for a lower interest rate. A lower interest rate may mean that you will be able to carry a higher balance and end up paying less overall.
Insurance carriers might deny or restrict coverage to applicants who do not pass minimum credit standards. If you are an applicant with a borderline credit score and history, you may pay more for your annual premium. In some cases, a carrier will require you to authorize automatic monthly payments from a checking account if your credit score is inadequate. An insurance carrier considers you to be less of a long-term risk when you have a higher credit score. With a higher score, carriers might offer you lower premiums for car and home insurance.
You may need to put a larger down payment towards substantial purchases, such as a vehicle, when you want to take out a loan. A bank may be willing to lend those with lower credit scores a loan, as it is only for a certain percentage of the vehicle's purchase price. If you have a short credit history or high amounts of revolving debt you might need to take out a loan for a longer term. While the monthly payments for a five-year car loan versus a three-year loan will be less, the total cost of the purchase plus interest will be higher.
Some credit card issuers may insist that you establish a secured credit line if you have little or poor credit history. A secured credit card means that you must pay an upfront amount in cash. The credit card company holds this amount and allows you to charge purchases against it. For example, a secured credit card with a line of $500 allows you to charge purchases and carry an outstanding balance up to $500. You do not get your $500 back until you close the account or the bank allows you to convert the account to an unsecured credit line.
Helen Akers specializes in business and technology topics. She has professional experience in business-to-business sales, technical support, and management. Akers holds a Master of Business Administration with a marketing concentration from Devry University's Keller Graduate School of Management and a Master of Fine Arts in creative writing from Antioch University Los Angeles.