Access to consumer credit is not an entitlement. On the contrary, it is earned, over time, by proving creditworthiness.
Granted, once you're in the club, plenty of lenders are willing to extend terms – sometimes aggressively, as credit card companies do, using direct mail. But the passage from “no credit” to “good credit” isn't automatic. The more you do to build and protect a good credit rating, the better your chances of using various types of credit to enhance your life and reach your financial goals.
Building a Solid Credit Foundation
Your credit rating reflects your track record managing debt and balancing your personal finances. Each entry has the power to undermine or boost your overall score, so it is essential to treat each transaction with the weight it deserves. Late payments, excessive use of revolving credit, loan default, and other credit inconsistencies quickly set you back, so the formula is simple. Orchestrate positive credit outcomes, again and again, and credit reporting agencies will share the good news with would-be creditors and other interested parties. Fail – even once, and your financial foundation remains vulnerable to adverse credit reporting.
1) Access to Diverse Credit Resources
Throughout a lifetime, consumer credit steps-in to buoy your finances, helping you realize your monetary goals. Your earliest financial interactions, for example, may include revolving credit terms, extended by a major credit card company and installment arrangements made with auto lenders.
Each form of funding serves a particular purpose, so interest rates and repayment terms vary, according to the financing you select. Installment loans, such as those used to buy vehicles, call for regular payback until preset principal and interest are fully paid. Revolving accounts, on the other hand, enable you to add to your balance between billing periods. In either case, a strong credit rating opens the door to the best interest rates and repayment terms.
In practice, your credit history is distilled to a single number, used by lenders to qualify your credit applications. The credit scoring system assigns the highest scores to consumers with a history of effectively managing diverse forms of credit. Is your revolving debt well-managed? How many credit accounts do you maintain at any given time? Does your history include default, foreclosure, or delinquencies? Answers to these and other questions help lenders decide who's eligible for financing, reserving the best access for applicants in the upper tier of credit scores.
2) Major Purchases
Without a solid credit score, you may have a hard time qualifying for mortgage financing. With payback commonly extending for decades, landing big-ticket funding depends upon your ability to mitigate lender risk. A credit score above 700, combined with a strong credit report, for example, increases your chance of securing adequate financing. While a questionable score, complicated by a “messy” credit report, may stand in your way.
In practice, most consumer credit reports fall short of excellent, but don't contain substantial strikes against would-be homeowners applying for loans. Unfortunately, even an average credit score can leave you wanting, resulting in less favorable mortgage terms. To consistently qualify for the best conventional loan terms, it is essential to maintain a strong credit history, in the upper tier of scores.
3) Housing and Employment
In addition to its impact on future credit outcomes, your credit score also comes to bear on other consumer relationships. Some jobs, for instance, call for credit clearance, illustrating your success in managing money. Without a good credit score, you may be passed over for employment, in favor of a higher-ranking applicant. Since leases and other contracts are just like credit agreements, your score also serves an important function, providing a form of reference.
From your earliest credit relationships, reporting agencies to monitor and assess your financial behavior. Building a strong track record repaying debt, and managing cash flow illustrates creditworthiness, opening doors to various forms of financing. A checkered history, on the other hand, increases risk for lenders and creditors in your path, so a low credit score works against you every time. These examples illustrate a few of the ways your credit score can make or break your financial future.
It's Max again -I've always been cautious with my credit rating over the years, and admit that's it's paid off. Based on my estimate over the past few years, I've saved at least $24,000 between various Auto & Home loans based on my credit score alone.
My bank provides free FICO credit score tracking, and you can see from the screenshot below that I've kept that score at a healthy level. Interestingly enough, it took a bit of a hit right around the time I started this blog. It's still above 800, which is considered exceptional, and pretty much guarantees the best rates on loans.
If you pay careful attention to the score early in your financial journey, it should translate to some significant savings over time.
Do you think credit scores are important? Has it helped or hurt your finances?