Your credit score is personal look at who you are and how responsible you are with your finances. To the world, it is a reflection of your behaviors and your character over an extended period of time. What you do and how you handle your money is recorded and available to thousands of people, and will affect your lifestyle for a lifetime.
Does this sound like I’m placing more than due importance on this than is due? Banks and credit card companies consider your credit score as an indication that you are a person that keeps their promises and manages their finances well. Consider that your credit score alone can determine what you are able to buy, what car you drive, where you are able to live, and even what job you may be able to get.
Credit scores range from 300 to 850 points and the three major credit bureaus each “score” your credit according to their own set of criteria. These criteria are weighted differently from bureau to bureau, but some of the factors are the same. They will look at how many credit lines you have open, and how long you have maintained them. They consider your payment history on each credit line. Even accounts that are closed will continue to affect your credit scoring for years to come. They will also see the total amount of credit available to you and how much of it you have used. Most importantly, legal judgments against you will also affect your credit score, as will debts sent to collection, charged off, settled for less than was due, or a bankruptcy or foreclosure.
All of this information becomes a part of your “permanent record”. At the very least, most negative information is on your credit report for at least seven to ten years. Even after this, it is not always easy to have derogatory information removed from your report.
Why does all this matter? If you ever want a credit card, an auto loan, a personal loan, or a mortgage loan, your credit score is going to be the major deciding factor. And in some cases, it could actually make the difference of getting that better paying job you always wanted. Employers will often check your credit report before they make that job offer.
Credit cards provide users with a great deal of convenience and flexibility in the timing of purchases. You might think availing yourself of a great sale price on needed items is a good way to use your credit. And if you are responsible with your finances, and don’t over-extend yourself, and pay your bills every month on time, you could be right. But if you are not careful, they have the ability to cause long-term harm to your financial situation and even your lifestyle. Just one late fee has the potential to completely reverse any savings you may have gained on a credit card purchase. Not to mention that your interest rate can be increased over your initial agreed upon rate. Default rates on some credit cards are more than 30%.
A good credit score (usually over 700) will make any kind of financing you need as affordable as it could possibly be, while lower scores will mean you pay more for everything you buy on credit.
Do you need a mortgage to buy a home? Most buyers do. With recent changes in the mortgage industry, the guidelines for approving residential mortgages have gotten more and more stringent. The days of 100% financing are essentially gone. Most mortgage lenders want to see credit scores of 680 and above for the lowest down-payment loans. The lower your credit score, the more cash will be required to purchase a home. Many potential buyers will have to put off the purchase of a home while they save the required down-payment. And while they are saving, sometimes the market conditions change. If prices continue to rise, the required amount needed rises as they are trying to save it up. And the size of the mortgage needed in order to buy a home can increase enough to price a buyer right out of the market.
The importance of your credit score cannot be under-estimated. The higher your credit score, the more financial options will be available to you. Your credit will cost you less, and that means you pay less for the things you buy. So protect your credit score. Practice delayed gratification. Buy only what you can afford, and compare prices. Mistakes are costly. For a lifetime.