No matter your relationship with credit cards, it’s important to know about and understand your credit score. And whether you like it or not, certain life events can have a major impact on this number. Not sure which ones matter the most? Here are three major life events that could impact your credit score and how they might do it.
Car Accidents
There are nearly 200 million Americans who own a valid driver’s license, and this represents a majority of the entire American population (around 325 million people). Every day, commuters, cargo trucks, motorcycles, buses, and pickup trucks all take up space on the road. Fortunately, most drivers are careful about how they drive. But traffic accidents are still dangerously common. In fact, there are nearly six million traffic incidents across the United States every year, and the Texas Department of Transportation has reported that one crash happens in the Lone Star State every 59 seconds in a given year.
Why might accidents happen? One common cause is drunk driving. In other cases, traffic accidents happen because a driver is distracted by something like their phone. Finally, the weather can also make roads dangerous. Snow, ice, and even heavy rain can make roads slick and tricky to navigate.
How does all this tie into your credit scores? Getting into a car accident will not directly harm your personal credit score, but your credit may suffer in indirect ways instead. Indirectly, a car accident will probably impact your financial life drastically. First, insurance premiums will likely be higher than they were before your accident. Even if you were only partially at fault, insurers may start viewing you as a high-risk driver. Higher premiums can not only wreck your finances, they may impact your credit score.
Your car is probably either noticeably damaged or completely totaled. If you can’t afford your car repairs out of pocket, the time may come to take out a loan. Ideally, your personal credit score will be fairly high, so the interest on such loans will be limited. Conversely, a low credit score will mean high interest rates, if you got approved for a loan at all. In other cases, you may need to replace your car entirely, and that means visiting your car dealership and financing it. If you’re not careful about the kind of payments you’re making to pay off your auto loan, your credit score could be negatively affected..
In addition, you may end up in the hospital after a car accident, and medical bills for injuries like these are likely to be high. Having a very good medical insurance policy may limit your co-pay, but even then, the cost may be higher than you’d like. In fact, you might be saddled with hundreds of thousands of dollars in medical payments, which can wreak havoc on your credit score if you’re not careful.
Business Loans
The United States is home to several million business enterprises, most of which are on the small side. Small companies may not be profitable at all in their first few years of operation, and even with investors on hand, they may not have enough money to cover all of their expenses and allow their enterprise to grow. The best option for many people is to take out a small business loan. What sort of loans might a business owner take out? Truck carrier companies might take out loans to buy a new vehicle or truck trailer. Bakeries might take out loans for industrial baking equipment. You may even take out a loan in order to purchase the property you’d like to house your business on.
But how does that affect credit?
First of all, if you’re a small business owner, it’s important to note that you have not only a personal credit score, but a business credit score, too. Unfortunately, nearly 45% of small business owners do not know this. They may have a poor business credit score without even realizing it. What’s more, business and personal credit scores may become intertwined, at least for you as a business owner. This is crucial to know. If you, as a business owner, have a low personal credit score, then your business credit score can be lowered as well, which can hurt your odds of getting any requested loans approved. Fortunately, paying off personal loans responsibly boosts not only your personal credit score, but your business score, too.
In addition, when you take out a loan as a business owner, you’ll be held personally responsible for it. What does that mean? If your actual business funds cannot cover the loan at some point, then you’ll need to pay back that loan with your own personal finances. Talk about an attack on your credit scores.
Mortgages
Becoming a homeowner is an exciting prospect. Owning your own property can be immensely rewarding. But the majority of home buyers can’t possibly pay the full price of their new home upfront. Just for one example, the median home price in New York’s Suffolk county clocks in at almost $415,000. Some areas are even more expensive than that. Even in cheaper counties or cities, the price for a new home is formidable. It’s time to take out a loan.
A mortgage is a loan like any other, so naturally, your credit score is going to be a factor upfront. When you apply for this loan, the company you’re going through will look up your credit score from three sources to determine the median, and use that as a reference. If your score is low, it may be difficult to get a mortgage at a good interest rate, or even get any loan at all.
But let’s say that you’ve been approved for a mortgage. At first, your credit score will probably drop a few points. Fortunately, that will change. If you want that change to be positive, it’s critical to make mortgage payments on time. And of course, being delinquent or late on mortgage payments will definitely harm your credit score. Borrowers are urged to be 100% sure that they can handle all mortgage payments right on time as soon as they arrive. Diligence is key.
In addition, take note that a mortgage payment period is up to you. One option is to take out a 15-year mortgage, which means a lower total to pay overall since there are fewer installments where interest is added. The reduced overall total is appealing, to be sure, but be aware that this also means larger payments in each installment, since the overall loan is being broken up into relatively few pieces. This is ideal for borrowers who can handle higher payments each month. Another popular option is a 30-year mortgage, in which the end total will be higher since there are more installments where interest is added. The upside to this repayment structure is that each individual payment per month is lower. So this option may appeal best to borrowers who don’t mind a larger end total in exchange for lower monthly payments. Borrowers with a relatively modest income may want to choose this option for their mortgage.
Why Is a Good Credit Score so Important?
Credit affects almost every major event in your life. Today, most everyone is urged to start building credit sooner than later, especially if their future plans involve starting a business or buying a house. Financial literacy is vital for anyone who wants to responsibly build credit. It should also be noted that taking out a loan for its own sake is not usually a good idea. But a good credit score can unlock all sorts of options later in life, from buying a house to getting approved for a large credit card to starting a business or buying a boat or RV. And if disaster strikes, a good credit score and a good healthcare insurance policy can help keep your finances in decent shape.