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Your Guide to Building Credit by Using Credit Cards Responsibly

Credit cards are powerful tools that can help you build excellent credit—but they can also sink your finances. Money Girl answers a listener question about healthy ways to use credit cards. You'll learn how the credit system works, tips to manage cards, and how credit affects your entire financial life.

By
Laura Adams, MBA
Episode #583
 Your Guide to Building Credit by Using Credit Cards Responsibly

6 Ways Credit Affects Your Finances

If your goal is to build credit so you can qualify for a mortgage or other large loan, that’s terrific. Having higher credit scores allows you to get approved for the best terms and lowest interest rates.

But besides cutting interest, your credit affects many other aspects of your everyday life, even if you don’t borrow money! There are a variety of companies and industries that use credit to evaluate you, even though they’re not giving you a loan or a credit card.

Here are six ways credit affects your finances even when you don’t borrow money.

1. Employment

Employers in most states have the right to check your credit reports, with your permission. Although the credit report available to employers is slightly different than the version a potential lender can see, it can still reveal any financial problems you might have.

Checking your credit is common for certain jobs and industries, such as working in finance or being in upper management, and it’s becoming a more widely used practice for all types of job screenings.

The idea is that if you have a poor credit history, you might not be disciplined or responsible when handling money. Employers may fear that you have the potential to steal or that you’ll be distracted at work due to financial troubles and not offer you a job.

2. Leasing

Most landlords, property managers, and leasing companies check your credit as part of the application process to make sure you’re likely to pay rent on time. If you have poor credit you may get turned down to lease or have to pay a larger security deposit.

3. Cell phone contracts

Cell phone companies check your credit when you apply for a new contract to make sure you’ll pay their bill. If you have poor credit you may be charged higher rates, a higher security deposit, and not qualify for top-tier wireless plan offers.

4. Utilities

Credit also plays a big role in utilities, such as water, gas, power, and cable service. Applying for these services is applying for credit—so having poor credit makes it difficult to get them. You might have to pay a hefty security deposit, get someone with good credit to co-sign your application, or get a letter of guarantee from someone that says they’ll pay your utility bill if you don’t.

5. Auto insurance

Auto insurance is regulated by states, so the rating rules vary depending on where you live. While no state allows credit to be the only factor in setting auto rates, a few states have banned its use completely.

6. Home insurance

Just like with auto insurance, home insurers also use your credit when setting rates for home, condo, and renters policies. Again, no state allows credit to be the sole factor in setting home insurance rates, and it’s prohibited in several.

This isn’t a complete list of all the ways credit affects your finances but may be the most eye-opening. The main point to remember is that when you build credit, not only do you become eligible for credit accounts, but you save money and improve your overall financial life in multiple ways.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a trusted and frequent source for the national media. Her book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show. 

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