Credit scores play a huge role in your financial life. They help lenders decide whether you're a good risk. Your score can mean approval or denial of a loan. It can also factor into how much you're charged in interest, which can make debt more or less expensive for you.
A poor credit history can have wider-ranging consequences than you might think. Not only will a spotty credit report lead to higher interest rates and fewer loan options; it can also make it harder to find housing and acquire certain services. In some cases it can count against you in a job hunt.
Credit is part of your financial power. It helps you to get the things you need now, like a loan for a car or a credit card, based on your promise to pay later. Working to improve your credit helps ensure you'll qualify for loans when you need them.
Three common credit problems are: Lack of enough credit history. Denied credit application. Fraud and identity theft.
Good Credit Puts Money in Your Pocket
Good credit management leads to higher credit scores, which in turn lowers your cost to borrow. Living within your means, using debt wisely and paying all bills—including credit card minimum payments—on time, every time are smart financial moves.
Having an empty credit report with no evidence of your borrowing history makes you look riskier to lenders. This could increase your chances of being denied for a credit card or loan.
When credit grows, consumers can borrow and spend more, and enterprises can borrow and invest more. A rise of consumption and investments creates jobs and leads to a growth of both income and profit. Furthermore, the expansion of credit influences also the price of assets, thereby increasing their netto value.
“A high credit score means that you will most likely qualify for the lowest interest rates and fees for new loans and lines of credit,” McClary says. And if you're applying for a mortgage, you could save upwards of 1% in interest.
Credit is the power to borrow money for the things you need now, with a promise that you'll pay back the money later. The two major types of credit are revolving credit and installment credit.
Your credit score is your reputation as a borrower of money, it's an indicator of how likely you will be able to pay that money back. Your credit score helps to determine if a lender will approve you for a loan or line of credit. It also determines what type of interest rate you will receive on the loan.
If you don't have credit, they may require you to use a co-signer or co-borrower. Some utility and cell phone companies also run a credit check and may require a deposit if you don't have a credit score. They may refund the deposit after a few months of timely payments.
Having a bad credit score isn't the end of the world, as long as you work toward improving it. While bad credit may make it more difficult to achieve financial milestones, such as being approved for an auto loan or mortgage, there are steps you can take to repair your credit score.
If you don't have good credit, you may miss out on securing a low-interest rate on a mortgage, personal loan or credit card, and wind up paying more during the term of your loan. But if you establish a good credit score, you can save money on interest payments and use the savings to invest in your future.
Why Your Credit Score Matters. Lenders use your credit score to determine your creditworthiness. Your credit score affects whether you get approved for credit cards, loans, mortgages, and auto loans, and influences the interest rate and terms lenders may assign you upon approval.
A lower credit score doesn't necessarily disqualify you from buying a home but you may incur higher interest rates and additional insurance requirements, which means you'll have a higher monthly payment and will pay more in total through the term of the mortgage.
Consumer credit is an important element of the United States economy. A consumer's ability to borrow money easily allows a well-managed economy to function more efficiently and stimulates economic growth.
Using credit also has some disadvantages. Credit almost always costs money. You have to decide if the item is worth the extra expense of interest paid, the rate of interest and possible fees. It can become a habit and encourages overspending.
Generally, your personal credit score is calculated based on credit reports from the three major credit bureaus—factoring information such as payment history, amount of debt owed, length of credit history, types of credit, and new credit.
A higher credit score signals that a borrower is lower risk and more likely to make on-time payments. Credit scores are often used to help determine the likelihood someone will pay what they owe on debts such as loans, mortgages, credit cards, rent and utilities.
In general, having no credit is better than having bad credit. But either unestablished credit or a negative credit report can make it difficult to qualify for loans or credit cards.
Having a "bad credit history," a "bad credit rating" or simply "bad credit" usually means your credit reports (and the credit scores that derive from them) show negative credit behaviors in your recent past. Credit is simply making a purchase or borrowing money with the agreement that you'll pay later.
The following common actions can hurt your credit score: Missing payments. Payment history is one of the most important aspects of your FICO® Score, and even one 30-day late payment or missed payment can have a negative impact. Using too much available credit.