Debt Free

Credit is the flip side of debt. You need to have one to get the other. Like everything else, credit has a cost associated with it. Something will facilitate your goal of getting debt free and improve your chances of landing in a happy financial place is to ensure your credit score is as high as possible at all times. Why, you ask? What if you're planning to stay debt free? Why on earth would your credit score be important then? Why indeed!

Your credit score is important even if you never again get another credit card or buy another vehicle on credit because so many other organizations use your credit score as a way of measuring risk and personal reliability. While it may not be fair in all cases, that's the way it is these days, so get used to it. It's not going to change any time soon. As with anything else, you can whine and cry about it, or use the system as best you can to your advantage.

So, how can your credit score cost you money, even if you're not using any credit? Here are some common examples of how having a low credit score can cost you money in everyday life:

1 – Renting a house or apartment – Nearly all landlords will run a credit check on potential tenants. If you find some that don't, start a website entitled “nocreditchecklandlords.com” It'll be inundated with bad credit renters looking for a new pad. For the rest of you looking for a new place to call home, be prepared to give up your credit information, and thus your FICO score. Too high and you'll not be accepted as a tenant. As it is illegal to discriminate against potential renters on the basis of such things as source of income, the credit score and report is one of the last ways a landlord can use to legally separate the wheat from the chaff.

2 – Auto Insurance Rates – Here's a biggie. Most insurance providers now incorporate your credit score into their risk assessment formula that's used to calculate your insurance rates. The insurance rates you pay will be, in some way, directly proportional to your credit score, all else being equal. Someone with a FICO score of 755 will pay less than someone driving the same car, with an equivalent driving record, and a FICO score of 600. Unfair, you say. Perhaps, but unless you own State Farm or GIECO, you're unlikely to get it changed in your lifetime, so recognize it and move on.

3 - Life Insurance Rates – Some actuary, somewhere, found a correlation between your credit score and your propensity to file a life insurance claim. Interesting, only the bad credit die young, I guess. Be that as it may, life insurers are now using your FICO much as auto insurers are doing, to asses risk. They'll charge you a higher rate, or deem you uninsurable, based in part on your credit score.

4 – Existing Credit – You may not take on any new debts, but a change in your credit score for the worse can prompt existing creditors to ratchet up interest rates you're paying now. Don't let that happen to you. It will raise the minimum monthly payment you're paying and put a crimp in your monthly budget. In addition, it'll be that much longer before you're debt free.

5 – Getting a New Job – Obviously, one of the best ways to get debt free is to earn more money. It's one of the legs of the financial triangle. Obviously, one of the primary ways you can accomplish an increase in income is to land a new job. Here's another area where a low credit score can work against you. The Society for Human Resource Management conducted a study of employers in 2004 and found that 20% pulled a credit report on 100% of their job applicants, not only applying for financially sensitive jobs, as was common in the past. Some state legislators are introducing bills to ban the practice of using a job applicants credit score as a screening technique. That's sure to be vigorously opposed by employer groups. On the other side of the coin, you'll have worker advocate groups and labor unions fighting to ensure such bans are enacted. How it'll end up is anyone's guess. One wonders how a credit freeze would affect a job application. Since many states allow you to freeze your credit report so no one can access it, would a potential employer deny you employment in such an instance?

These are some of the ways your low credit score can cost you money and slow your progress toward debt freedom.