Borrowing money allows you to purchase items you might not otherwise be able to afford upfront, such as a house or a car. However, it’s important to keep in mind that borrowing money – and paying it back – has a direct impact on your credit history. Credit bureaus monitor your debt and repayments and use that information to calculate your credit score. The lower your score, the harder it will be to get approved for additional loans or credit cards. And if you are approved, a low credit score could mean a higher interest rate. This is why it’s essential for you to manage your credit properly.
How Can Credit Affect Your Future?
Even if you don’t have any large purchases on the horizon that you anticipate needing a loan or credit card for, establishing and maintaining a good credit history is still important. Financial institutions use your credit report to determine the risk associated with lending you money; but they’re not the only ones who use such information. Landlords, cell phone providers, and even utility companies may review your credit score to determine whether you are eligible for their services. Your credit can also affect your insurance policies. Both auto insurance and homeowners insurance companies look at your credit score and use it to determine the rates you’ll pay.
Having a low credit score can cause major financial roadblocks for you, but so can having no credit history at all. Without a credit score, financial institutions and other businesses have no way of knowing how much of a risk you are to them. So, if you don’t yet have a solid credit history, it’s important to start building credit. You can do so by becoming an authorized user on someone else’s credit card, getting a co-signer for your own loan or credit card, or taking out a secured credit card or student credit card. Once you have some credit in your name, paying off your balance on time each month can help you establish good credit history.
What Things Impact Your Credit?
There are five main factors that affect your credit score - your payment history, credit utilization, the length of your credit history, whether you have a good mix of credit types, and how many recent credit inquiries you’ve had.
Let’s take a closer look at these important factors:
- Payment History. Paying your bills on time is essential to a good credit score. To increase your credit score, or maintain a good existing score, it’s essential for you to always pay your bills on time. If you have consistent 30-day late marks on your credit report, your score will surely decrease.
- Credit Utilization. The percentage of your available credit that you’re currently using is called your credit utilization, or credit usage ratio. For an optimal credit score, it is advised that you only use less than 30 percent of your available credit. You can reduce your credit utilization by making extra payments during the month and paying off your credit card balances in full.
- Length of Credit History. The longer you’ve had a particular credit card or loan, the better your score. Obviously, a loan will be marked as inactive as soon as you pay it off, but it’s a good idea to keep your old credit cards active, even if you don’t use them that often. That is, as long as you’re not being charged an annual fee to keep the card open.
- Mix of Credit Types. For an optimal credit score, it’s best to have a mixture of account types. if you only have credit cards, and no installment loans, it could work against you. It’s best if your credit report includes a couple of credit cards plus a mortgage, car loan, or personal loan. Having multiple accounts types can show that you can pay off loans with set monthly payments as well as you can pay off credit cards with fluctuating monthly balances and minimum payments.
- Credit Inquiries. Every time you apply for a loan or credit card, it results in a “hard pull” of your credit, which typically will drop your credit score by a couple of points. For this reason, it’s important not to apply for multiple credit cards or loans within a short period of time, especially if you’re hoping to be approved for a mortgage or other important loan in the near future.
What is a “Good” Credit Score?
Credit scores can range from 300 to 850 with 300 being “Poor” and 850 being “Excellent”. The exact ranges are as follows:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
Many people ask, “What is a good credit score?” If your score is near 700, most lenders consider you a good risk. You might not have the best interest rates, but they won’t be the worst, either. If your score is over 760, financial institutions will typically compete for your business, and you’ll be offered the best interest rates. With a “Very Good” or “Excellent” credit score, you may qualify for more favorable car insurance or homeowners insurance prices as well.
There’s no denying the importance of having a good credit score. A good credit history can make it easier to buy a home, borrow for a vacation, purchase a vehicle, or tap into your home’s equity. A good credit score can also provide you with the best interest rates available, leaving more money in your pocket that you can put towards retirement, your child’s college fund, or your emergency savings. We’d say it’s a win-win!