Using Your Credit. By LaToya Irby. LaToya Irby is a credit expert who has been covering credit and debt management for The Balance for more than a dozen years.
Learn about our editorial policies. Reviewed by Thomas J. Thomas J. Brock is a CFA and CPA with more than 20 years of experience in various areas including investing, insurance portfolio management, finance and accounting, personal investment and financial planning advice, and development of educational materials about life insurance and annuities. Learn about our Financial Review Board. Low Interest Rates on Credit Cards and Loans The interest rate is one of the costs you pay for borrowing money and, often, the interest rate you get is directly tied to your credit score.
Better Chance for Credit Card and Loan Approval Borrowers with a poor credit history typically avoid applying for a new credit card or loan because they've been turned down previously. More Negotiating Power A good credit score gives you leverage to negotiate a lower interest rate on a credit card or a new loan. Get Approved for Higher Limits Your borrowing capacity is based on your income and your credit score. Easier Approval for Rental Houses and Apartments More landlords are using credit scores as part of their tenant screening process.
Better Car Insurance Rates Add auto insurers to the list of companies that will use a bad credit score against you. Get a Cell Phone on Contract With No Security Deposit Another drawback of having a bad credit score is that cell phone service providers may not give you a contract. Bragging Rights Because of all the benefits, a good credit score is something to be proud of, especially if you've had to work hard to take your credit score from bad to good.
Article Sources. Part Of. Your Privacy Rights. To change or withdraw your consent choices for TheBalance. Credit scores are an important part of your financial health. You want good credit scores because they can unlock many savings and benefits, including access to loans and credit cards with the most favorable terms. Read on to find out why having a high credit score is beneficial. Americans often rely on credit—the ability to buy things with borrowed money that's paid back over time—to finance major purchases, such as buying a car or home, and to make life easier with conveniences like credit cards, which can help you manage your daily spending.
To determine whether you qualify for such loans, lenders may look at a number of factors, including your income, debt-to-income ratio , and even employment history. But they also almost always rely on an automated evaluation process that includes considering your credit scores and credit history to determine how likely you are to pay back your debts on time. A credit score is a three-digit number that's calculated by applying a mathematical algorithm to the information in one of your three credit reports from Experian, TransUnion or Equifax , which are updated regularly with information from your credit accounts.
Typically, the higher your credit scores, the more likely you are to qualify for loans with the most favorable terms, including lower interest rates, higher dollar amounts, and potentially lower fees.
When you take a large loan to finance a big purchase like a home or car, even a small difference in the interest rate can translate into thousands of dollars over the lifetime of a loan. Borrowers with the highest credit scores are generally able to secure the lowest interest rates available at a given time for a mortgage or auto loan. And that can mean big bucks. If that same borrower can get a 4.
Borrowers with strong credit scores will have access to the most loan and credit card products available since lenders will want to lend to them. They will be able to shop around and compare rates more effectively.
They'll also find the best terms, including higher dollar limits, which can make it easier to finance big purchases. High credit scores will afford you access to the most rewarding credit cards on the market, including those that offer the lowest interest rates and the best rewards, such as cash back offers, travel points, and other incentives.
You can't be turned down for insurance if you have a low credit score, but having a high score can help you qualify for lower insurance premiums on car insurance. Some landlords of rental management companies consider a potential tenant's credit scores to determine whether they are financially trustworthy.
The higher your credit scores, the more likely you are to be approved for a home or apartment rental. You could also save money on your security deposit if you have higher credit scores. Some utility companies may consider your credit reports and scores to determine how likely you are to pay your bills on time. If you don't have a strong credit history, you may have to pay a security deposit to initiate utility services.
While each consumer likely has dozens, if not hundreds, of credit scores , the good news is that what makes scores go up or down across different models is almost always the same. It's just that different models may apply different weights to certain factors. There is no secret sauce to getting good credit scores.
Generally speaking, the best way to improve your credit scores is to do the opposite of what caused them to go down in the first place, and give yourself enough time for them to improve. While each scoring model gives different weight to the factors that affect your score, there are usually seven factors that go into determining your scores :. But a good credit score may allow you to finance one at favorable terms that let you pay little or no interest. Without good credit, you'd likely need to buy the phone upfront or pay a higher interest rate if you qualified for financing.
Much like a potential lender, a landlord will want to check your financial trustworthiness by taking a look at your credit. This gives insight into how likely you are to pay your rent on time every month. If your score is too low or your report has too many negative marks, getting that dream apartment may be difficult.
In order to predict potential losses on customers, some car insurance companies factor in credit-based scores when determining monthly premiums. The better your credit score, the better your shot of receiving a reasonable deal. You can't be turned down altogether on the basis of credit, but you're unlikely to see affordable premiums if your credit score is too low. Before taking you on as a customer, a utility company might look at your credit report to get a sense of your payment history.
Although they have to get your permission beforehand, some employers will request to see your credit report as part of your job application.
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