Most financial advisors and people dispensing personal advice will tell you how important it is to increase and maintain your personal credit score. But just how important is your credit score, and do you really need yours to be as high as possible?
Credit Score Basics
When most people talk about a credit score, they’re talking about your individual FICO credit score, which is a number between 300 and 850. This number is tracked and reported by three main credit bureaus in the United States, and it’s designed to indicate how trustworthy you are as a borrower.
This number is influenced by several factors, including how much debt you currently have, how you have made payments in the past, and how many accounts you currently have open. The more financially trustworthy you are, the higher your score will be.
Various financial institutions and other organizations can check credit scores of individuals at their leisure, determining whether an individual is trustworthy enough for a specific financial product or service. For example, when you apply for a mortgage, your lender will seriously consider your credit score before deciding whether to grant you a loan.
What Your Credit Score Impacts
These are some of the most important things that your credit score can impact.
- Loan qualification. Your credit score is one of the most influential factors in determining whether you can qualify for a loan. Whether you’re interested in getting a loan for a house, a car, or to start a business, your credit score will play a major role in determining whether you qualify. If you have a low credit score or if you have no credit, you might not qualify for a loan at all. If you have a sufficiently high credit score, you’ll qualify for the best possible loans. There are some exceptions to this; for example, you don’t need a high credit score to qualify for pre-settlement funding. However, most loans do require you to have a reasonable credit score.
- Interest rates and terms. Your credit score can also influence your loan interest rate and the terms of your loan. Generally, the higher your credit score is, the lower your interest rates will be; this is because people with lower credit scores are perceived as higher risk, so the higher interest rate compensates for that.
- Property rental. Before you can rent an apartment or a house, your landlord will investigate your credit score and other factors. Landlords want to make sure you’ll consistently pay your rent on time.
- Utility accounts. Utility companies often conduct a credit check before starting service at your house. You will never be denied access to necessary utilities, but you may be required to put down a deposit, depending on your credit score.
- Job searches. Employers can also access your credit score, even if they can’t use that as the sole reason for hiring or not hiring you. It’s important to realize that prospective employers can and will look at your credit.
Living With Poor (or No) Credit
Does that mean that it’s impossible to live with poor credit or with no credit?
The short answer is no. It’s possible to live a full and fulfilling life even with non-existent credit. However, you’ll be missing out on some important financial opportunities and you’ll need to make some important lifestyle changes and compromises. Most notably, you’ll need to be prepared to pay cash for just about everything, including your house and your car.
How to Increase Your Credit Score
Here’s the good news: it’s not especially hard to increase your credit score, as long as you have the time to do it. These are some of the best strategies for doing it:
- Avoid opening new accounts. If you already have some credit accounts open, avoid opening new accounts. Opening too many new accounts at once can cause your credit score to decrease.
- Make your payments on time. Make a commitment to paying all your bills on time consistently. Missing payments is one of the most common causes for credit score decreases, but you can reverse this momentum by making all payments on time in the future.
- Catch up on past due accounts. If you have any accounts that are currently past due, now is the time to revisit them and catch up on them.
- Pay down your debts. On top of that, it’s important to pay down your debts. The less debt you have, the higher your credit score will be and the more likely you’ll be to qualify for loans.
The bottom line here is that your credit score, while not absolutely necessary to live a full life, influences many variables related to your life and can open the door to many new opportunities. It’s important to pay close attention to your credit score and improve it however and whenever you can.
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