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8 Reasons Why Good Credit Is Important
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Think of your credit score as your financial blood pressure and you’ll quickly understand why monitoring it regularly is just as important as going to your doctor for a routine check-up.
“A good credit score means cheaper loans, lower interest rates and monthly payments, and better offers for credit cards,” said Gage Kemsley, vice president of Oxford Wealth Advisors in Rio Rancho, N.M. “In contrast, a poor credit score leads to higher interest and fewer options for loans, which could translate to an unhealthy financial life.”
A 2018 LendingTree study found that consumers with a “fair” credit score (580-669) can expect to pay over $45,000 more in interest payments over a lifetime of common debts like autos loans and mortgages than their counterparts with a “very good” score (740-799).
Here are eight important reasons why you should keep your credit score in good standing:
1. It can affect your ability to get a job
From law enforcement to financial institutions and government agencies, many potential employers include a credit check, with the prospective employee’s written permission, as part of the application process, said Todd Christensen, a Boise, Idaho-based financial counselor and director of education for Debt Reduction Services Inc.
“I had in one of my financial workshops a young lady who even had her credit checked when she was applying for a cashier position at a regional bookstore chain,” he said.
2. It can get you better offers for credit cards
Having excellent credit will get you better terms, like lower interest rates, for financial products such as credit cards. Lowering your cost to borrow can save significant amounts of money in the long term.
3. It can affect your car insurance premiums or your ability to qualify for a loan
Poor credit could affect your ability to qualify for a car loan, as lenders will see you as a greater risk of defaulting on your debt. But did you know that the vast majority of car insurance companies also use a credit-based score to determine monthly premiums?
“The neighbor of one of my former employees stopped him one morning to tell him that two months after filing for bankruptcy, his monthly car insurance tripled,” Christensen said. “There had been no changes to his driving record.”
4. It can affect the deposits you’re required to pay for products and services
Credit scores are often used to calculate deposits for products and services ranging from apartments and rental units to cell phone and utility bills, said Brittney Mayer, a Gainesville, Fla.-based credit analyst at CardRates.com.
“Someone with a low credit score who wants to open a new mobile phone line may be asked to put down a larger deposit than someone with a good score,” she said.
5. It can impact your ability to get a business loan
If you have poor personal credit and want to open a small business, you may find it difficult to qualify for a business credit card or loan, Mayer said.
6. It can save you tens or hundreds of thousands of dollars on your mortgage
Having good credit can save you a significant amount of money on the largest purchase you’ll likely make in your life — your home.
“The difference between a 699 and a 700 FICO score could mean a half percent on a mortgage for some lenders,” said RJ Mansfield, a Chandler, Ariz.-based retired financial services professional and author of “Debt Assassin: A Black Ops Guide to Cleaning Up Your Credit.”
“It doesn’t sound like much, but that half a percent could easily translate into tens or even hundreds of thousands of dollars over the life of your mortgage,” he said.
7. It can increase your home insurance premiums
A 2017 Quadrant Information Services study found that those with a fair credit score could pay 36% more for home insurance than someone with excellent credit. And if you have poor rather than excellent credit, your premium could more than double, increasing by an average of 114%, or even higher depending on the state in which you live.
8. It can affect where you get to live
Property managers frequently run a credit check in their application for potential residents.
“One of my former employees called an apartment complex where she and her husband wanted to live — they were engaged and getting married — and was told not even to bother applying unless they had a credit score of 670 or higher,” Christensen said.
How you can improve your credit
There’s always room for improvement when it comes to your financial health. Here are some ways to improve your credit score:
Keep your credit cards open
Keep the accounts open and active, but only use them for small purchases that you can pay off every month.
“I have my first credit card I opened with my credit union when I turned 18, and while I don’t use it [often], I still keep the account open and in good standing,” Kemsley said. “Those old cards are still establishing a length of credit history, even when they aren’t being used.”
In addition to your credit history, keeping accounts open will help lower your credit utilization ratio, a key factor in determining your credit score.
Check your credit report and score frequently
Monitor your credit report and score for mistakes.
“The sooner you spot mistakes, the easier they are to correct,” Kemsley said.
If you see something that looks wrong, contact both the credit bureau and the organization that provided the incorrect information as soon as possible.
Pay bills on time
Put a reminder in your mobile phone or on your calendar to avoid forgetting a payment, which can jeopardize your credit score. Better yet, consider automating as much of your financial life as possible, including your bills, said San Diego-based Alissa Todd, a wealth advisor at The Wealth Consulting Group.
“If you have your bills set up on auto-pay, you can avoid late payments,” Todd said. “Not only will this improve your score, it will help save you money that you are paying in interest and any late payment penalties.”
Request a higher credit limit, but don’t use it
It’s important to stay conscious of the amount of credit you’re using in relation to the total amount of credit available to you. The rule of thumb is to use less than 30% of all your available credit, Todd said.
One tip is to ask for limit increases on your credit cards. Having a higher unused amount of credit reduces your credit utilization rate, which has a positive impact on your credit score. This only works if you can resist the temptation to spend more — use your credit cards responsibly, Todd cautioned.
Consolidate your credit with a personal loan
Although holding a variety of loans such as car payments, credit cards and mortgages can help diversify your credit portfolio and improve your score, sometimes it makes more sense to consolidate all your debt with one personal loan.This is particularly true in the case of consolidating home equity loans and lines of credit, since the interest payments are typically tax-deductible. Consolidating your credit will also allow you to save on interest costs from multiple balances and only have to worry about managing one monthly payment.
Limit hard inquiries on your credit report
Your credit score is affected every time there is a hard inquiry, or when a lender pulls your credit to check your rating. If you are shopping around for a car loan or mortgage and want to compare rates, try to arrange for those inquiries to be made in a shorter time span so that they can all be grouped as one inquiry, Todd said.
If you’ve ever wondered why you didn’t get the job or apartment for which you seemed perfectly qualified, one possible explanation could be your credit score. In a world increasingly reliant on algorithms for approval processes, credit scores are frequently used to judge consumers’ reliability and financial risk, while weeding out applicants who don’t meet the basic criteria.
From lower interest rates on bank loans to cheaper insurance premiums, having a good credit score can not only save you significant sums of money over the long term, but can also help you achieve your goals of home ownership and financial well-being much faster.