Credit score is one of the most important components of our financial lives. If you have ever applied for a loan, you already know how it determines your creditworthiness. However, the importance of your credit score doesn’t end there. Our credit scores keep following us forever, playing a critical role in numerous financial circumstances throughout our lives. Credit scores are used by insurers to set premiums for homeowners, as well as, auto coverage. Landlords use this tool before renting out their apartments. Even the best cell phone plans are reserved by the providers for individuals with excellent credit scores. Therefore, under these situations, it is extremely important for you to know your credit score.
Why does it Matter?
Be it credit cards, loans, cell phone plans, apartments, or insurance premiums, great credit scores help us quality for the best of deals. On the other hand, a poor credit score may result in outright rejection. Even if it is approved, bad credit always means paying more.
Paying higher interest rates because of mediocre or bad credit throughout a lifetime can even exceed six figures. As an example, an individual with FICO scores around 620 is likely to pay $65,000 more compared to one with FICOs over 760, on a $200,000 mortgage. Similarly, a low credit borrower will pay $5,100 more on a $30,000 auto loan with the tenure of five years.
In one word, our financial lives are heavily dependent on credit scores. This is why it is really helpful to keep a track of this score, and clearly understand how it can be affected by our actions. Regardless of your income or age, it is possible to build and maintain a great credit score.
How does it Work?
Most individuals have more than one credit score, and these scores keep changing all the time. Credit scores are ascertained based on information supplied by three credit bureaus, Equifax, Experian, and TransUnion. Credit bureaus collect data about individuals, and how they have used credit in the past, then use this information to calculate their credit scores. The three bureaus have a different scoring formulas.
In order to keep track of your credit over a period of time, you must monitor the same score type generated by the same bureau. There is no need to pay for knowing your credit score. Free credit reports are offered now by many online financial resources.
Building Credit without Debt:
Millions of individuals around the world don’t have any credit score simply because they have never used credit in the recent past. There are two common ways for you to start building credit.
- Credit-builder loans offered by financial institutions and credit unions are a great way to build credit. The borrowed money is placed into a savings account or certificate of deposit that can be claimed after monthly payments for a year.
- Credit can also be built by using secured credit cards that provide a line of credit equal to the deposited amount.
Good Habits for Growing Credit:
Mentioned below are some good credit habits.
- Paying all bills on time.
- Regular, but light use of credit accounts.
- Paying all balances in full.
- Closure of credit accounts should be avoided.
Maintaining Credit Scores:
Once you have fought your way to good credit, maintaining the same can be equally difficult. Just one delayed payment can result in the loss of more than one hundred points. You may avoid such lapses by setting all credit accounts on auto-payment mode. Your credit score may also be dented by a lawsuit judgment, collection account, or identity theft.