If you ever want to buy something on credit, how you’ve handled borrowing in the past matters.
At some point, you may need or want to buy something on credit. It’s not always feasible to save up ahead of time and pay for a major purchase like a home or a car out of pocket. This is where your credit reputation comes into play. Simply put, your credit reputation is a public-facing set of information on how you’ve handled borrowing money in the past.
The Impact of Credit Reputation
Responsible use of credit can demonstrate trustworthy financial behavior which can help you build a positive credit reputation. For example, would you lend money to someone if they’ve borrowed from you before and didn’t pay you back? Probably not. If, on the other hand, you loaned money to someone and they paid you back as agreed, you’d be more likely to trust them and lend them money again in the future.
Lenders are no different. If you have a poor or non-existent credit reputation, they may not be willing to lend to you. Or, if they do, they may charge you a higher interest rate than someone who has a better credit reputation.
The example below demonstrates the financial impact this can have.
Good Credit vs. Poor or No Credit
Jeff and John are both buying a preowned car with a purchase price of $15,000 with a loan term of five years. See how their credit reputation affects their interest payments.
Good credit reputation
6% interest rate
Jeff will pay $17,400 in total for his new car, the principal plus $2,400 in interest.
Poor credit reputation
15% interest rate
John will pay $21,400 in total for his new car, with $6,400 in interest.
It’s More Than Finances
Credit impacts more than your financial life. Employers, landlords, and retailers may review your credit to determine your level of financial responsibility and potential degree of risk. If you’re serving in the military, a poor credit reputation can impact your ability to get or keep a security clearance, and may even limit promotion, and certain job opportunities.
Know that good credit doesn’t happen overnight. It takes time and diligence to build your credit reputation.