Your personal credit rating follows you through life, reflecting your history of credit interactions. From an early age, your performance managing phone contracts, car loans, credit cards balances and other forms of consumer credit form the basis for your rating. Each positive entry fortifies your financial reputation, slowly helping your credit score inch upward. Late payments and credit inconsistencies, on the other hand, quickly erode your creditworthiness – particularly in the eyes of creditors.
With so much on the line, your credit score is one of your most important financial concerns. In fact, treated properly, it serves as a lifelong asset, reinforcing your ability to borrow money and make purchases you’d otherwise be unable to afford. As you manage personal finances and plot for future financial security, consider these essential reasons to protect and preserve a positive credit rating.
Credit Scoring Summarizes Your Financial History
In order to weigh risk and evaluate individual applicants, lenders rely on a standardized series of credit reports. The summaries, furnished by credit reporting agencies, acknowledge financial transactions in which you’ve participated, including details about payment habits and account irregularities. The sum of these interactions is ultimately distilled to a single “credit score”, assigning a number to your credit performance. Lenders use credit scores to evaluate potential clients and match applicants with qualified financial products. There are several reasons to nurture and protect a high score.
Access to Credit – The past predicts the future, so creditors use your history to forecast risk. With a high credit score and well-managed debt history, you are in a good position to land needed financing, as long as your income level supports repayment. A low credit score, on the other hand, closes doors among lenders, who cannot afford to do business with risky borrowers.
Good credit is not built overnight, so each gain should be protected and reinforced with responsible cash management. It is much easier to maintain a positive rating than it is to erase missteps, which typically stay on your record for several years.
Low APR and Flexible Terms – The higher your credit score, the more power you have to negotiate the best possible terms for financing. The lowest credit card APRs, for example, are reserved for users with excellent credit scores and a history of timely payments. Without a strong rating, access to top tier rates is limited, leaving you to pay more interest on credit card balances. Similarly, the mortgage industry extends the lowest rates to well-qualified buyers, who may also sidestep mortgage insurance requirements and other measures aimed at poor credit applicants. Good credit borrowing options may also include flexible repayment terms, granting further privilege to borrowers with the best credit scores.
Affordable Insurance Premiums – Like banks and other lenders, insurance companies strive to limit risk exposure. As a result, applicants with good credit are given preferred rates. Your location, claims history and other factors also weigh heavily on premium amounts, but a strong credit rating works in your favor, as underwriters price policies.
Communication and Utility Accounts – Establishing basic service accounts, for electricity and other utilities, is more difficult for those with credit inconsistencies working against them. Like other vendors, utility companies and phone service providers seek assurances bills will be paid, so a poor credit score is a major stumbling block for securing favorable terms. Even your cable TV company uses credit information to vet potential customers, illustrating the long reach of your credit score.
Employability – Depending upon your field, credit references may be required to secure employment. Though employers cannot discriminate based on your past, it is easy for most would-be employers to justify credit checks. Even if your job doesn’t involve direct money management, a solid credit history illustrates responsible behavior, which is desirable to employers of all kinds.
Repairing a damaged credit rating is much more difficult than maintaining a positive financial reputation. As you borrow money and repay various forms of credit, it is important to abide by the terms of each arrangement, making timely payments, until obligations are cleared. Delinquency, default, foreclosure and other irregularities will quickly diminish your credit score, limiting your eligibility for future financing. Stay true to repayment schedules and debt obligations, on the other hand, and your high credit score will help carry you toward financial security.