Why your Credit Score Matters: What You Need to Know
At some point, you may need to borrow funds from a lender and maintaining a good credit score will make the application approval process easier. Your credit score determines two important things and can affect your chances for getting approved. First, lending money entails risk, and your credit rating tells prospective lenders how reliable or unreliable you are at repaying loans.
Second, your credit score determines what sort of terms you are likely to get. A better credit rating not only improves your chances for getting credit, but also into how favorable the interest rate will be on the loan.
Additionally, credit scores have been known to be used for things like renting an apartment, signing up for a specific cell phone plan or utility, and setting auto and home insurance rates
Why is maintaining a good credit rating your best investment? Because over a lifetime, a good credit score can translate into tens, if not hundreds, of thousands of dollars in interest savings--money you will have had for countless other life goals.
What is a credit score?
A credit score is a numerical expression that allows lenders to numerically judge your credit at a point in time. It gauges how likely you are to repay your loan in a timely manner. The better your history appears, the more attractive you become as a loan customer.
The three credit bureaus, TransUnion, Equifax, and Experian, whose models for establishing your credit score vary, are the services that most lenders rely on for information about you. The credit scores they generate are based on several factors such as:
- Your previous history of repayment
- How much debt you currently have
- How long credit accounts have been used
- What types of credit you have
- how often you’ve pursued new credit recently.
Simply put, better credit scores usually lead to better rates and better terms.
How can I improve my credit score?
There are different steps you can take to improve your credit score. Of course, they won’t happen overnight, but tackling current debt by ways of debt consolidation or limiting the amount of new accounts you inquire about are some options. Here are some examples of how to improve your credit score:
- Repayment history. Make sure you make all loan payments on time and for the appropriate amount. Even one late payment can affect your score for a period of time.
- Current debt. Your current debt is compared to your total available credit, and if that ratio is high, it can negatively impact your credit score. Try to avoid carrying large balances and keep debt levels to under 30% as a rule of thumb.
- Credit account age. The longer a credit account has been open and in good standing, the better this reflects on your credit score.
- Credit type. A home loan has a more positive impact on your credit score than a credit account with some financing companies. Check on the effects before signing up for that “no-interest for a year” financing plan.
- New credit. Try to limit the number of times you apply for credit. While not all views by prospective creditors are viewed negatively, frequent credit applications will depress your score.
In addition, here are a few things you can do to get a handle on your debt and improve your credit score:
- Cut back on unnecessary expenses
- Apply the savings to paying off debts
- Pay off and close multiple credit card accounts. See: A Fail Safe Way to Reduce Credit Card Debt
Paying off your debts will generally improve your score within a few months. Keep this goal in mind and work toward it diligently.
Do I need credit counseling?
One additional way to tackle or manage your debt is through credit counseling or debt management agencies. These are “non-profit” companies that provide several different types of services.
Credit counselors will work with both you and your lenders to find a fair resolution. Most lenders are willing to do this because they receive some of their owed money back in a timely fashion. As you improve your credit, your score will improve as well, eventually granting you access to higher credit limits with better terms.
Monitor Your Credit
Like our shadows, our credit history follows us everywhere we go. Whether your score is high or low, it’s important to continue monitoring your credit situation. All three credit reporting agencies allow you to request your credit report once each year for free. Take advantage of this.
Also, most credit card companies allow you to track your credit score for free within their respective apps, this convenient benefit let's you stay aware of your score and sometimes even alerts you when unusual activity is posted.
Do I need perfect credit?
Absolutely not. Lenders aren’t looking for consumers with “perfect credit.”A better credit score translates into a better loan., but you shouldn’t, for example, put off buying and starting to build equity in a home, even if you can’t get the best rate out there.
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* Please consult with your attorney, financial consultant/planner, accountant, and/or tax advisor for advice concerning your particular circumstances. The information contained herein is for general informational and educational purposes only and should not be construed as professional, tax, financial or legal advice or a legal opinion on specific facts or circumstances. The information or opinions contained herein should not be construed by any consumer and/or prospective client as an offer to sell or the solicitation of an offer to buy any particular product or service.