When it comes to living the American dream, credit matters! Disparaging comments made by some financial experts about the dangers of borrowing money and the suggestion that cash should be used at all times ignores the simple fact that most Americans require credit to buy a house, car or large ticket item. Credit reporting agencies are responsible for developing your credit scores and reflect your level of risk to potential creditors. A high credit score is essential and key to saving money in a couple of important ways.
An Overview of Credit Scores
Your credit history is established with your first loan or line of credit and builds over time as you open new accounts. The three major credit reporting agencies collect this information and use it to calculate your score – Experian, TransUnion, and Equifax. Your credit reports include your current address and where you’ve lived in the past, current and past employers, court settlements, in addition to all your financial history.
What’s the big deal about a credit score anyway, you may ask? Well, without one, you’ll be hard pressed to get a mortgage, auto loan, apartment and, in some cases, even a good job. Banks, landlords and employers may use your scores to determine their risk. In other words, your credit scores can influence all aspects of your life.
How Credit Scores are Calculated
The following chart shows the general breakdown of how a credit score is calculated. Your credit history accounts for the majority of your score by encompassing a few areas that show how well or poorly you manage your financial accounts.
When it comes to saving money, your credit score can be quite influential when it comes to borrowing money, since its primary purpose is to serve as an advisory tool for lenders. The higher your score the more responsible you’re presumed to be in handling your money; lenders will be more willing to approve you for lower interest rate loans with better terms and perks. On the flip side, a low credit score will result in more loan rejections, higher interest rates and fewer benefits.
FICO scores range from 350 to 850. Use this FICO Rating Chart to determine your current credit standing. There are five FICO score ranges:
Impact on Credit Card Accounts
For many of us, the biggest impact credit scores have is on how much we pay for the privilege of borrowing. Credit cards have become a necessary evil in today’s society, and in the wrong hands, they add to our financial burdens with high interest charges, unexpected fees and overwhelming debt. But a well managed account is an important tool and will help build, improve and maintain a strong credit rating.
If you have an excellent credit score, the cost of using a credit card will be lower than a person with a poor rating. You’ll be approved for lower APR cards that will cost less, even if a balance is carried over from month to month. You’ll enjoy cards with no annual fees and better terms in general. A high credit score will also open up opportunities to transfer high interest rate balances to new accounts with lower rates, including those with 0% introductory APRs and long introductory periods.
Impact on Loans and Mortgages
In the same way that an excellent credit score generates better terms for credit cards, a high credit score will mean lower monthly payments, better terms and more savings on mortgages and auto loans. An interest rate that’s just a few percentage points lower could save thousands! Your home being the biggest investment you’ll probably ever make, it’s important to maintain a high score to ensure that you can get the financing you may want or need in the future to improve and maintain your investment.
Impact on Employment
Competition in the job market is fierce and employers are more choosey than ever when looking for employees. If they review your credit score and see dismal ratings, you may be passed by for someone whose credit score demonstrates more responsible behavior. In particular, companies that deal with money will use your credit score as an assessment tool to determine your ability to handle the job.
Credit reporting agencies have different ways of calculating credit scores and often receive contradictory information. This is why it’s important to review all three separately for errors. You are entitled by law to one free report each year from all three credit agencies. To order, visit annualcreditreport.com, call 1-877-322-8228. Or complete the Annual Credit Report Request Form and mail it to:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281