The credit score may very well be the most fundamental element in personal finance today. Without good credit, it's virtually impossible to get loans, quality mortgage rates, or even more essential services like a cell phone plan or car rental. Needless to say, it is vital that you build a good credit history and that you do it consistently.
In this article, we shall highlight a few ways your credit history affects you and how you can build yours.
Before we get into credit history, it is important to understand what a credit score is and its impact on your everyday life.
To break it down, a credit score is a three-digit number from 300-850 that estimates how likely you are to pay off your loans and debts. A good credit score usually ranges from 690-719, while an excellent score ranges from 720-850. Usually, it is used by lenders or creditors to determine whether you are eligible for loans, credit cards, mortgages etc.
Now, let’s take a closer look at the impact your credit history has on your credit score and ultimately, your approval rating for countless services.
Your credit history is basically a record of how you've managed the repayment of debts such as credit cards and loans in your past. It typically contains information such as the accounts you have opened or closed over time, what type of accounts they are, how much you owe in each one of them, and whether you pay your bills on time.
As we mentioned, credit history is one of the more influential parts of your credit score. In fact, it constitutes a whopping 35% of it. And this means it can affect your ability to get certain services. Some ways your credit history is used include:
Your credit history is used as evidence of whether you can or cannot make your mortgage payment. With a good credit score, you'll be more likely to get a creditor to approve your application and grant you good interest rates.
The same applies to renting an apartment. In some cases, the landlord will require your credit report. They use this information to determine if you can pay your dues on time. With a bad credit history, you might end up paying a larger security deposit.
Insurance companies usually use credit-based scores to assess your risk levels and calculate your premiums. With good credit, you basically have bargaining power. You can consider asking them to re-run your rates and give you the best premium rates available.
Like insurance companies, auto-lenders also check your credit to determine the interest rates they will give you. You also stand to get better deals during promotional periods with a good credit history.
The better your history of making payments, the better your interest rates will be. With good credit, you even have the option of refinancing your loan. This means taking out a new loan to pay off one or more outstanding loans. This will allow you to receive lower interest rates or to otherwise reduce their repayment amount.
Whether or not you have been making payments on time in the past determines how much of a security deposit the utility companies are going to charge you. The lower your score, the higher the deposit will be.
Phones can be expensive these days; some are well over $1000. With your credit history, you can ask for a payment plan from your cell carrier and get the phone you desire. The carrier will use your credit information to determine if you will be able to make your payments on time.
Employers also look at your credit history to assess whether you will be a liability for their business. It helps them understand the risk of potential of theft and embezzlement. That goes to say, that with good credit history, you stand a better chance of getting your dream job.
Now that you know the different ways your credit history can affect you and why good credit is so important, let's look at some ways you can build and/or improve your score.
Once you've established a good credit score, it is important to remember to monitor and maintain it. Checking your score is free and can be done on personal financial websites.
The most commonly used scoring models are VantageScore 3.0 and FICO 8. They weigh their scoring factors a little differently. So, make sure you use the same scoring model each time you check your score.
In a nutshell, your primary aim should be getting a good credit score. With a good score (around 700 or so), you are considered a good risk. And this allows financial institutions and creditors to trust you with their money and offer reasonable interest rates. You can also begin thinking of investing in a retirement plan and saving money in emergency funds.
By following the tips above, you'd be taking a major step towards achieving a healthier financial position. For other financial tips, visit one of our locations today.