Why do credit ratings play such an essential role in our everyday lives?
Credit ratings are essential because it indicates how likely an individual, a business, a city, a county, a state, or even a country is to repay a debt. Each one of these entities has a credit rating, and depending on positive or negative factors a rating can be upgraded or downgraded.
For example, the United States had always maintained a top-tier AAA credit rating, but recently one of the major credit-rating agencies, Standard & Poor's, downgraded our country’s credit rating for the first time.
As a result America’s cost of borrowing increased by billions of dollars per year, which inevitably impacts consumers with higher interest rates and borrowing costs.
It’s no secret that failing to address our long-term debt triggered America’s downgrade, according to S&P. While our country still has a very strong AA+ credit rating, this historic move has impacted our country significantly.
As consumers we have our own personal credit ratings to be concerned about. A downgrade of our personal credit scores can impact our lives tremendously.
In particular, FICO scores are the most widely used credit ratings in the world. It is recognized as the standard measure of consumer credit risk here in the United States.
You have one score from each of the major consumer credit agencies. This number ranges from 300-850 with 725 considered the starting point for excellent credit risks.
Your score is calculated each time it is requested; either by you or a lender. And each time it is calculated it’s using the information that is on your credit report at that time. So any negative changes to your credit reports can trigger a downgrade.
How much your score changes depends by a variety of factors such as missing a payment, incurring excessive debt, filing for bankruptcy, and excessive inquiries.
Here are some examples of how a credit rating downgrade can impact your life:
- Expect to pay 20-30 percent more in premiums for car insurance.
- Interest rates for personal loans can be between 17-26 percent.
- Over 70 percent of major companies will check your credit rating as part of employment screening. A downgrade can impact your chances of obtaining a job.
- It can prevent you from obtaining housing since many rental property owners check credit ratings during the tenant screening process.
- You may be required to pay a deposit when opening an account for utility services.
- It can prevent you from getting a student loan.
- With a credit rating downgrade you may be denied for a regular cell phone contract and be required to use a pay-as-you-go agreement.
As you can see getting your credit scores downgraded effects you in more ways than one. However, there are steps you can take to recover and improve your scores.
First, get a copy of your free annual credit reports from each of the major consumer credit agencies. Second, review your reports and initiate a dispute if you uncover any inaccuracies.
Finally, begin rebuilding your credit reports and review the booklet “Understanding Your FICO® score” to get a better knowledge of the credit scoring process.
Don't get discouraged because you can reclaim your good credit ratings as long as you take the necessary steps and put the time and effort into making it happen.
Marco is founder of the Business Credit Insiders Circle, a step-by-step business credit builder system providing fleet credit cards, vendor lines of credit, business credit cards, merchant lines of credit, and funding sources. You may contact Marco directly at: marco@businesscreditblogger.com. Follow Marco on Twitter @MarcoCarbajo and read more of his insights on business credit with no personal guarantee.
