You’ve likely been told that a good credit score is important. Maybe this information was passed down to you from your parents or grandparents. While of course you believe them, do you really know why credit is considered to be vital to your financial well-being? First and foremost, lenders use credit scores as a way to determine how likely you are to repay a loan. If you look like a good risk, they’ll lend to you; if you don’t, they won’t.
Your credit score is based on a scoring methodology that takes into account your financial information and track record. Everything from your bill-paying history to your current debt to your credit requests is factored into your score.
No matter your current credit score, it can
almost always be improved. The good news is, you can enhance your score just by
making slightly different financial decisions. Curious to learn more? Keep
reading to discover the importance of credit and how you can maintain a good score
once you achieve it.
1. It Gives You Financial Power
Above all, a good credit score is important because it will give you more financial power. You will have the ability to apply for loans without being turned down. You won’t have to rely on others or go to several banking institutions to get a loan. You are in the driver’s seat and are apt to get the best loan with the lowest interest rate for your needs.
A good credit score isn’t necessarily hard to keep, but it isn’t a no-brainer either. For example, you may think that the more credit cards you have, the better. This isn’t always the case, and applying for multiple cards at the same time can even decrease your score. What you need to think about is long-term stability. Being financially unstable or spending more than you can afford doesn’t look good in the eyes of banks.
If you find yourself overspending, you may
want to consider a secured
credit card. With this type of card, you can only spend
money that you’ve put down beforehand. This cash — often known as a security
deposit — becomes your credit limit. This means you can’t go into debt or find
yourself spending more than you have deposited. Secured credit cards can help
build or repair poor credit scores, and they’re easier to obtain than unsecured
ones.
2. It Enables You to Make Big
Life Decisions
There are certain stages in life that many people dream of. Buying a new car or a home are two big life choices that depend on your credit score. Even if you have your sports car picked out, it probably isn’t a done deal until you get a car loan. A good credit score will enable you to qualify to get a loan at a lower interest rate. And remember, the higher the interest rate, the more you’ll be spending on the car in the long run.
When it comes to purchasing a house, a good credit score is essential to getting prequalified for, and eventually securing, a mortgage. It’s generally recommended to go to a few mortgage lenders to compare rates. However, you may not even get past the prequalification step unless you have good credit. A mortgage lender is going to want a guarantee that you will pay back the loan on time and in full before qualifying you.
If you’re considering buying a new car or a
home, your best bet to improve your credit is to start early. Begin by paying down
your credit cards to reduce your credit utilization, which accounts for 30% of
your score. Also, continue to pay off any current debt such as student or auto loans.
On-time payment history shows the banks that you are financially responsible —
which is why it makes up 35% of your credit score.
3. It Allows You to Live Well
Lastly, good credit simply allows you to live happily and well. Many different parties who influence your life will look at your credit history. This includes mortgage lenders, utility providers, landlords, and employers. Nearly every aspect of your life, from where you live to where you work, can be impacted by your credit score.
You may be surprised to learn that getting utilities hooked up depends on your credit score. This is because you are essentially borrowing a month of service prior to paying your first bill. Before the lights go on in your new home or rental, the electric utility will do a credit check. Other utility providers, including water, cable, and cellphone companies, also require good credit. If you don’t have it, you may be charged a significant deposit before they’ll provide you with service.
If you suspect that your credit report is
lower than it should be, you can fix it. Approximately 25% of Americans have errors on
their credit reports, so reviewing yours could be beneficial to you. You may
find misreported payments or even fraud on your report. To get your free annual
reports from all three credit bureaus, Experian, TransUnion, and Equifax, make
a request at AnnualCreditReport.com.
Making Your Credit Work for — Not
Against — You
Your credit report is somewhat like a grade
school report card. The difference is that this report weighs much more heavily
than how well you did in gym class! Improving your credit won’t happen
overnight, but it’s not impossible. With consistent efforts, you can raise your
score — and open the door to new financial opportunities.
read more: Paul Inouye