Why Is Good Credit Important
Your credit history is an indication of how youâve managed debt in the past, and many companies use it to predict your future financial behaviors. So when you apply to do things like borrow money, get a credit card or rent an apartment, your credit history may be looked at.
Good credit scores may suggest youâre responsible and practice good financial habits, like paying your bills on time. But low credit scores may give the opposite impression.
Thereâs no one-size-fits-all way to know how credit is judged. But the Consumer Financial Protection Bureau offers some ways you can build good credit. And Capital One has six tips about using credit cards responsibly that may be helpful, too.
Good Credit Vs Bad Credit
Having good credit means that you are making regular payments on time, on each of your accounts, until your balance is paid in full. Alternately, bad credit means you have had a hard time holding up your end of the bargain you may not have paid the full minimum payments or not made payments on time.
Negative information generally stays on your credit report for at least seven years.
Maintain And Defend Your Scores
You have a lot to lose once you have good scores, generally 690 or above.
A single skipped payment can knock more than 100 points off your numbers. Consider putting all your credit accounts on auto-payment to prevent such a lapse.
A collection account or lawsuit judgment can dent your scores as well. Stay on top of medical bills, since many go to collections with little notice.
Identity theft can devastate scores, a good reason to monitor your credit report. You can get free credit report information through NerdWallet, updated weekly. You are currently entitled to a report from all three credit reports once weekly not all information shows up at each bureau, but most does.
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What Is My Credit Score
The main companies that calculate credit scores based on the original FICO model are Transunion, Equifax, and Experian. You are entitled to a free credit report from each company every year.
The number of your credit score will range from 300-850. Understanding where your score is on this spectrum and how lenders might look at it can help you know what changes you may need to make.
- What is a bad credit score? A number below 580 indicates a very poor credit score. Scores in this range are typically too risky for lenders.
- What is a fair credit score? A fair credit score ranges from 580-669. You are more likely to get credit, but expect higher interest rates and lower limits.
- What is a good credit score? A score from 670-739 is considered a good score. You will be able to get credit with decent limits and interest rates.
Credit scores 740 and higher are very good to excellent and will afford the best interest rates and higher limits. You can improve your credit score. If you need help some companies offer those services, such as the one in this link.
Having A High Credit Score Could Give You Access To More Favorable Loans Credit Cards And More
Good credit. You mayâve heard the term more times than you can count. Thereâs a reason for that.
Itâs because credit can touch many parts of your life. For example, it may impact where you live, how much money you can borrow and how certain employers may view your job application. Read on to take a closer look at the benefits of good credit and how you could work on improving your own.
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The Importance Of A Credit Score
The importance of a credit score and how a credit card can help you increase your score If a lender has rejected your loan, and you are wondering why, the culprit may be a low credit score.
Your credit score is an important indicator to lenders of your ability to repay loans. A credit score is a three-digit numeric summary of your entire credit history. It is prepared based on data gathered from lenders and is consolidated in the Credit Information Report or CIR.
Financial institutions use your credit history and score as one of the factors to determine whether to lend you any money, how much and at what rate.
The benefits of a good credit scoreA good CIBIL score can get you:
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Lower interest rates
What to do to increase your CIBIL score: Make payments for your loan dues on time Maintain a balance between secured and unsecured loans. Reduce the number of loans you borrow in any year. Keep a balance between your income and debt.Another good way to increase your credit score is by prudently using your credit card. Here are a few tips:
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Keep well within your spending limits. Maxing out on your credit cards every month may be considered impulsive by lenders
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Pay your bills on time: Settle your credit card bills in full every month well before due date. Avoid revolving credit, as it may be seen as risky credit behaviour. Settling your dues on time will save you late fees as well as interest costs, and improve your credit score.
Why Are Credit Scores So Important
- Banks Editorial Team
Why are credit scores so important? Your credit score is important because it is a financial tool used by banks, insurance companies, credit card issuers, landlords, mortgage finances, auto-loan providers and other lending entities to determine the creditworthiness of an individual and assess how much risk you carry before giving you any credit.
Ok, so what is a credit score exactly? It is the three-digit number found in your credit report which indicates how creditworthy you are which ranges from 300 being the lowest and 850 as the highest. Why is credit score so important? The higher your credit score, the more money you will save! Check your credit score now to see how you rate:
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Factors That Affect Your Credit Scores
The individual components vary based on the credit-scoring model used. But in general, your credit scores depend on these factors.
Most important: Payment historyFor both the FICO and VantageScore 3.0 scoring models, a history of on-time payments is the most influential factor in determining your credit scores. Your payment history helps a lender or creditor assess how likely you are to pay back a loan.
Very important: Credit usage or utilizationYour is calculated by dividing your total credit card balances by your total credit card limits. A higher credit utilization rate can signal to a lender that you have too much debt and may not be able to pay back your new loan or credit card balance.
The Consumer Financial Protection Bureau recommends keeping your credit utilization ratio below 30%. This may not always be possible based on your overall credit profile and your short-term goals, but its a good benchmark to keep in mind.
Somewhat important: Length of credit historyA longer credit history can help increase your credit scores by showing that you have more experience using credit. Your history includes the length of time your credit accounts have been open and when they were last used. If you can, avoid closing older accounts, which can shorten your credit history.
Why Do You Need A Good Credit Score
Since banks and other lending institutions use your credit score to assess how worthy you are of credit approvals, it is important to have a good credit score.
If you have a higher credit score, it means that you have demonstrated responsible credit behaviour in the past. This may help potential lenders have more confidence in approving requests for loans and other credit. You might also get other benefits, such as lower interest rates, better terms of repayment, and a quicker loan approval process.
Different lenders may also emphasise different aspects of your credit score, such as your income or your payment history.
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How Can A Credit Score Hurt You
A poor credit score can become a hindrance. As we mentioned above, you will likely receive less-than-favorable terms from your lender. You may find yourself paying more in interest or struggle to find a lender willing to work with you at all. This could have a direct impact on your life, as it can affect your ability to buy a car or a home.
How Banks And Businesses Use Your Credit Report
Lenders, businesses, and other entities may look at your credit report and credit score to help decide how financially trustworthy you are. Thus, establishing good credit can help you get approved for loans or a credit cards, earn lower interest rates, get approved for higher lines of credit, and more.
There are two main types of : hard and soft. Hard inquiries usually occur when you apply for a loan, mortgage, or credit card. But they often come with a price. CFPB points out that hard inquiries can hurt your credit score since most scoring algorithms pay attention to how often you apply for credit.5
Soft inquiries provide a basic overview of your credit history and wont impact your credit score, according to CFPB. Prescreened credit card or loan offers typically rely on soft inquiries.
And dont worry, your credit report isnt openly accessible to anyone. Thanks to the Fair Credit Reporting Act , strict laws dictate that only governments and businesses with legally acceptable reasons can request access.6
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Why Are Credit Scores So Important To Lenders
Why are credit scores so important to lenders? A credit score helps lenders determine who qualifies for a loan and what interest rate, credit limit and terms an individual should receive based on their riskiness. In other words, the higher your credit score, the better the interest rate and perks you can get and the higher the credit limit. A better interest rate means more money in your pocket in the long run since you will pay back less $ in interest. Needless to say, a better credit score means helps you get more easily approved in renting an apartment and qualifying for a credit card.
Auto Loans Require Good Credit
Most people do not have the money to fund a vehicle and cover living expenses at the same time. Many will apply for an auto loan. Your credit rating affects whether you are qualified, the amount you can receive, and the interest rate of the loan. Generally, loan applicants with a higher credit rating can qualify for larger loan amounts with lower interest rates.
A low credit rating will limit your choices. Few lenders will work with you if you have low credit, and those that do will charge a much higher interest rate on your auto loan. A higher interest rate will significantly raise the amount you pay monthly on the car, which raises the total amount you’d pay over time.
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What Information Is Included In Your Credit Report
The Consumer Financial Protection Bureau notes that each credit bureau creates a slightly different credit report, but most are split into four or five main sections1:
Take Advantage Of Your Good Credit
Once your scores near 700 or so, youre considered a good risk. When theyre over 760, youre golden. You should expect the best rates and terms lenders have to offer, since theyll be competing hard for your business.
Reconsider your auto insurance as well, especially if your credit has improved substantially since your policy was set up. Your current insurer may not check your credit at renewal time ask it to re-run your rates. Its a good time to shop around as well.
With all the money you save, you can make progress on important financial goals such as saving for retirement, boosting your emergency fund or getting out of debt faster.
Thats the real power of great credit scores. Instead of begging for loans, paying too much and trying to make do with whats left over, youll finally have some options to get ahead.
Liz Weston is a certified financial planner and columnist at NerdWallet, a personal finance website, and author of Your Credit Score. Email: Twitter: .
This article was written by NerdWallet and was originally published by The Associated Press.
About the author:Liz Weston is a columnist at NerdWallet. She is a Certified Financial Planner and author of five money books, including “Your Credit Score.”Read more
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Why Having A Good Credit Score Is Important
Having a good credit score can be beneficial for several reasons. Most of these reasons revolve around your ability to secure getting new loans. Having a higher credit score will make it easier, in general, to get a new loan. A higher credit score can also make the terms of any new loan better for you. Better terms could include:
- A higher loan amount.
- Lower interest rates on the loan.
- Lower fees associated with your loan.
Although loans are the most common use for your credit score, landlords also have an important use for your credit score. When you apply to rent a house or apartment, landlords have the option to check your credit score to determine how risky it could be to rent their property out to you. Having a higher credit score could give you a leg up on other applicants for the same property.
Which Credit Score Matters The Most
The credit score that matters the most is whichever one is being checked by the entity you’re dealing with. When you apply for a loan, credit card, or any other kind of credit, the entity you apply to can decide how and where to check your credit. In general, FICO scores are used most often, especially in lending situations.
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What About Free Credit Scores
Heres where things can get tricky. If you can genuinely get free access to your credit score, then theres no reason not to check it. But a lot of free credit reports arent free at all, so you have to be careful.
Some credit card lenders offer a free report & score to their customers. This is the best way to get a free score. Your lenders are buying it on your behalf and giving it to you as a perk of being their customer. No tricks or gimmicks, just a free score. See CFPBs list of companies that offer free credit scores to their customers.
Then there are some services we talked about in our article The Real Path to a Free Credit Score, including Quizzle, CreditKarma, and CreditSesame. These services give you a free VantageScore in exchange for signing up and sharing data with them. They use your info to deliver targeted ads to you. If you dont have any privacy concerns with this kind of advertising model, then this is a good way to get a free credit score.
Another model for free credit scores isnt really free. Some companies offer a free credit score as an incentive to sign up for a monthly credit monitoring service. You do get your score for free up front, but quickly youll start seeing monthly charges that can be hard to cancel. There are good reasons for some people to buy credit monitoring, but we want people to enter this agreement willingly and with clear eyes, not tricked into it by the offer of a free credit score.
Role And Importance Of Credit Score
Consumers, purchasers and business ventures alike are highly dependent on credit in the present day. The entire system of the availability of credit, the time period of the acceptance of an offer is dependent on your credit score. Having an excellent credit score is a must for the availability of loans and credit for the purchase of something exclusive and bespoke.
However, the importance of credit score is not merely restricted to those who seek credit. It can also help you get more attractive insurance options, and can even present a more responsible image of you in the eyes of prospective employers.
Let us learn more about the various concepts related to credit score and the benefits of maintaining a high credit score.
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How Can You Improve Your Credit Score
If you dont have a great credit score, there are some things that you can do to improve it. Keep in mind that it may take at least 30 days for changes to show up on your credit report.
Improving your credit score takes time and will not happen overnight. But, implementing a few of the following ideas and concepts can help you build credit.
Length Of Credit History
Lenders like to see that you can manage credit accounts responsibly over a long period of time. This is why its a bad idea to close old credit cards, even if youre no longer using them. Your credit report only tracks active credit accounts, and when you shut down your oldest credit accounts, you shorten your credit history. If you want to build good credit, keep your credit cards open.
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