Credit Scores are Important

Credit Scores are Important

Have credit, will buy ... has become our way of life. It has allowed us to make purchases that we might not otherwise be able to afford.

Published Tuesday, October 18, 2016 4:00 pm

Have credit, will buy ... has become our way of life. It has allowed us to make purchases that we might not otherwise be able to afford. It certainly has made it possible for us to attain items "now" rather than having to wait to make the purchases until we saved the needed funds. But the key to purchasing, using either credit or cash, is "afford." If our expenses exceed our income, or consume too much of our income, neither cash nor credit will benefit us in the long run.

Our ability to obtain credit is typically part of a purchase transaction -- which depends on the information that is contained in your credit report and subsequently, your credit score. The information documented on a credit report is used to determine one’s credit score, which is a measure of risk in the eyes of a lender. Credit reports document credit habits, both current and historical.

Criteria analyzed to determine scores include payment history, outstanding debt, length of credit history, pursuit of new credit, and types of credit in use. Since these reports and scores affect one’s ability to obtain credit, they have a direct effect on the possibility of buying a home or vehicle, renting an apartment, insurance rates or even in some cases, getting a job. 

A positive credit report and high score offers numerous benefits to a consumer. For example, a higher score means lower risk so credit is more easily attainable. Also, higher credit scores earn lower interest rates, low or no fees on loans, and lower monthly payments. On the other hand, a low credit score is a sign of high risk so if credit is granted, typically a higher interest rate is attached to the loan making the money borrowed more expensive. (This can mean $1,000's over the life of the loan.)

There are three main credit reporting agencies: Equifax, Experian, and TransUnion. All of these generate a credit, or FICO score, which is determined by Fair Isaac and Company. Because the scores may differ slightly between the three agencies, many lenders will review all three reports as part of the loan approval process.

FICO scores range from 300 to 850. Generally, a good credit score is anything above 700 points. This high score indicates to lenders that the applicant is low-risk and very likely to repay the loan on time. A credit score below 700 puts one in a higher risk category and may jeopardize the approval of the loan. There are ways to make a positive impact on a negative credit report over just a few months to a year. Delaying a purchase and taking the extra time to improve a credit score will pay off in the long run. Here are the most important ways to improve your credit:

  •  Pay bills on time every month.
  •  Maintain plenty of unused credit instead of maxing out credit cards.
  •  Don’t apply for credit unless it’s absolutely necessary. Inquiries on your report can have a negative effect.
  •  Check your credit report at least once a year and correct any errors that hurt your credit.

 The best place to start is: www.AnnualCreditReport.com to request your free credit report from each of the reporting agencies. While other websites may claim free reports, there is usually a fee included. This is the only website supported by the Federal Government for free annual credit reports.

For more information on understanding credit reports and scores, please visit the following sites:

https://www.cafecredit.com/

http://www.aie.org/manage-your-money/

http://www.consumercredit.com/financial-education/credit.aspx

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