HOW THREE LITTLE NUMBERS CAN HAVE SUCH A BIG IMPACT ON YOUR LIFE

Anyone who has applied for credit is well aware of the impact a consumer’s credit report has on the acceptance or denial of a credit application. A consumer’s credit report is the only way a lender has of ascertaining that person’s debt risk. Lenders typically don’t look at the entire credit report; oftentimes a person’s credit score is enough to provide a snapshot of their financial health.

These three little numbers can be the cause of an acceptance or denial for all types of loans, including:

• Credit cards
• Personal loans
• Small business loans
• Auto loans/ financing
• Home loans/ mortgages

A person’s credit score is important when it comes to applying for credit. But it’s important for so many other reasons. The following article will discuss the lesser-known ways a person’s credit history and score can impact their lives.

APPLICATIONS OUTSIDE OF CREDIT

In addition to insurance, your credit history may also be checked as part of your application for:

• Cell phones
• Rental properties
• Utilities
• Employment
• Government assistance programs
• Government licenses

Having a poor credit history can interfere with your ability to get a cell phone, rent an apartment, and even get a job.

INSURANCE PREMIUMS

Insurance companies have long held a belief that there is a link between a person’s credit history and the likelihood that they will file an insurance claim. This belief was confirmed with research conducted in both 1991 and 2000. The 2000 study, conducted by James E. Monaghan for Metlife1, found that loss ratios (the difference between a consumer’s premiums and claims filed) increase with every collection account, negative public record, and delinquency on a consumer’s credit report. In fact, according to Monaghan, loss ratios were about 50% more for automobile policies and over 90% more for homeowner policies.

Since insurance companies don’t want to pay for costly claims, many began using credit scores as a way of assessing a person’s level of risk. A high credit score could cause insurance companies to deny coverage or provide coverage but only at a much higher rate.

However, how insurance companies who used the credit scoring model to calculate a consumer’s risk is a bit different than the traditional FICO scoring model. According to Liz Weston, author of Your Credit Score, the insurance breakdown looks more like this:

Weight for Insurance score	Weight for FICO score	Factor
40%	35%	Payment History
30%	30%	Amount Owed
15%	10%	Types of new credit, new accounts, inquiries, how long since opening of latest account
10%	15%	Length of Credit History
5%	10%	Types of Credit Used

Some people think that this policy is discriminatory – that minority groups are overrepresented in high risk groups. Many states have started regulating the use of credit history and credit scores on insurance applications. The Fair Credit Reporting Act requires insurers to notify consumers if their applications have been denied due to their credit history. Regardless of the laws in place to protect consumers, using credit scores to determine insurance eligibility is still used quite frequently.

A LOW SCORE LEADS TO HIGH COSTS

If this weren’t enough, a poor credit history could cost someone hundreds of thousands of dollars.

For example, the difference between an excellent credit history and a fair one could mean a 10% difference in credit card interest rates or a 4% difference in auto financing – both of which could amount to hundreds – even thousands– in extra interest payments a year.

A 1% increase in mortgage rates due to poor credit history could result in $100,000 difference in interest payments over the life of the loan! If we calculate the extra interest paid over a lifetime of someone with a poor credit history versus someone with a good credit history, the amount is staggering.

THE EFFECT ON THE HEART

It’s easy to see how our credit scores affect our wallets, but did you know that this three-digit number can also affect our hearts? In 2014, researchers from Duke University discovered a correlation between low credit scores and cardiovascular risk.2 The lower the credit score, the higher the risk for heart disease. This link was found to be the result of what the researchers called “human capital factors” (such as education, self-control and cognitive ability) acquired in adolescence.

Thinking about getting married or want to stay married? A 2015 paper published by the Federal Reserve Board titled “Credit Scores and Committed Relationships” notes that people are inclined to commit to a partner with a similar credit score and that partners with scores that are closer in number are more likely to stay committed.3 Also, people with higher credit scores are more likely to enter a committed relationship.

The research is clear: a person’s credit score is linked to many different aspects of his financial and personal life. Therefore, becoming knowledgeable about your credit score is one of the smartest things you can do.