What is a credit score? Why does a three digit number seem to control all financial aspects of your life? Are there any benefits to improving your credit rating?
These may be questions you find yourself asking, but first let's start with a quick overview of what a credit score really is. Your score is a numerical value that deems how much credit you have. The more popular way of determining a factor is a credit bureau risk score, and this risk score shows how likely and quickly you are to repay any money that you borrow through a loan. All this information comes from your credit report, so the higher the score, the better your rates. We cover more information about credit score basics at:
What do all these Credit Score Terms mean?
How to Improve Your Credit Score
What Can A Good Credit Score Do For Me?
So you may already understand the ins and outs of good credit rating, but what are the benefits of keeping your credit score high?
First and foremost is the ability to get a lower interest rate on loans - this is by far the most rewarding benefit! If you show a lender your great credit score, they will know you are reliable and able to make on-time payments; therefore, they will feel as though you are a low risk candidate and allow you to borrow without having to pay a lot of interest. If your credit is low, then they will not be so quick to give you a loan - but if they do then you will probably have a higher interest rate.
In many ways you are your credit score, and like it or not this is the only standardized way that lenders can judge your credit worthiness. The most unfortunate byproduct of this entire process is the fact that the highest interest loans are given to the people who are the least likely to pay them off; in short, a smaller loan with high interest often takes more time to pay off than does a larger loan with low interest.
Another reason for you to maintain a high credit score is for the ability to qualify for a no or low doc loan. These loans require less documentation of your income and assets than normal, since a higher credit score infers more responsibility. Once again, this is because of trust associated with higher credit scores. The higher your score, the less you have to actively document before a lender approved you.
Bad Credit Ratings...
If you have bad credit you may not be able to buy a home, or even rent an apartment since your credit score shows that you are just not be a risk that your landlord will be willing to take. Those places that may take you will often times require some sort of deposit, which can be non-refundable. This will be looked at as a payment in the event that something goes wrong. If you are planning on buying a home or car in the near future, a bad credit score will really affect you, and it may set you back as far as a year while you seek ways to repair your credit.
Trust Is The Main Factor
Now I'm sorry for my overuse of the word "trust" when it comes to credit scores, but come on! It's easy to see that good credit scores come from good payment habits, and the longer you maintain these habits the more likey you are to gain more trust from creditors as evidenced by things like lower interest rates or increased credit limits.
The moral of the story - stay on top of your credit score & spending habits at all costs, or it may end up costing you more than you bargained for!
Quick Credit Score Maintenance
Here are a few ways you can maintain good credit:
- Make all your payments on time. It sounds simple, but you can fall behind quickly and one missed payment can be enough to reduce your credit score substantially!
- Avoid closing old accounts and opening new ones. You want to show that you are stable if you can help it!
- Don't spend over your budget. Spend only what you can, when you can so you don't fall into credit card debt.
- Communitcate with your creditors. If you fall on hard times, tell them rather than just missing a payment. Most creditors have a payment program in place that will avoid you costly dings on your credit report, so often times a simple phone call is all you need to make!
Trust, stability, low risk - let this be your good credit score mantra!
Additional Resources:
James Thelander
Your Credit Network Contributer