At some period of our lives, we tend to neglect some of the factors that will have an impact on our financial health in the future. One such factor is the credit score. When we are younger, we do not pay attention to the credit score category we fall in. Most probably, we do not consider it as important as we should. This means that you can fall into the bad credit score category and be faced with limited borrowing possibilities or worsened borrowing terms. If you have a good credit score, try to keep it. If you have a bad credit score, make sure you increase it. You must try to understand why you need a good credit score.
Failure to understand the importance of a good credit score can have an impact on your life in the future. There are a couple of reasons why you need a good credit score. You should try and understand them.
The desire to buy a home in the future
As you know, purchasing a home would be one of the most important financial decisions you will make in the future. There are many benefits and drawbacks of owning your own home. But the fact is that almost every one of us will make the decision to buy a house. Regardless of the importance of this financial decision, it can turn out to be a difficult decision to be achieved if you haven’t paid attention to your credit score. This means that if you have neglected the importance of your credit score in the past, it will follow you in the future. Not having a good credit score can influence your ability to get a mortgage or the mortgage terms. If your credit score is not as high as required by the lender, you might be charged a higher interest rate on your mortgage or even get rejected for financing.
Moreover, if you currently do not want to make the big purchase of your home, you will need a place to live. Most probably, this would be renting a place unless you live with your parents or friend. You will need a good credit score when renting an apartment or house as well. Before renting agreement is signed, a credit check is performed. If the credit score is showing a delinquent score, then you may not be able to rent a place, or you will have to pay a larger deposit.
Ability to buy a car
A car should not be considered a luxury item (speaking about the average car, not the supercars or highly expensive cars) because we all need a car for our everyday activities. Thus, purchasing a car is something we are bound to do it. A lot of people are buying their cars by taking out a loan. Although car loans are smaller loans compared to mortgages, they do require you to have a good credit score. Not having a good credit score when applying for a car loan doesn’t necessarily have to mean that you will not get approved. Instead, it means that you will have to accept unfavorable loan terms. This means, then, when applying for a car loan with a bad credit score, be prepared to pay a higher interest rate. In addition, a low credit score would mean that the lender will ask for a larger down payment on your car. The need for a down payment is another reason why you need a good credit score. The insurance you will have to buy for your new car will also be more expensive because of your bad credit score. Insurance companies are taking into consideration the credit score level when calculating insurance premiums.
Lower cost on your loans
You need a good credit score because it is one of the most important factors when applying for a loan. But the reason for having a good credit score is not only the fact that you will get approved more easily. Namely, banks have tendencies to offer better interest rates to borrowers with a good and excellent credit scores. The banks perceive people with higher credit scores are less risky. Thus they offer lower interest rates. This means that having a good and excellent credit score will save you thousands of dollars in the long run. This is especially true if you take a mortgage. Which, most probably, you will sometimes get in your life.
In addition, you can have better deals on credit cards as well. You should be aware that the interest rates paid on credit cards can vary anywhere from 13% up to 23% or even more. One of the factors determining the interest rate you will pay is your credit score. So, try to understand why you need a good credit score and consequently try to maintain a high credit score. Then, you will have the opportunity to be charged the lower side of the interest rate interval. Hence, paying less interest rate means that you will have more money to spend or save.
Difficulty in recovering from a bad credit
Not paying a lot of attention to the credit score at a young age could have consequences later on in life. It is difficult to rebuild your credit score, and it can take a lot of time to do it. So, why not be responsible and build your credit score steadily? Do not go for the option that you can always rebuild it. Yes, you can (with difficulties). But most probably, you will understand the importance of a credit score when you will need access to credit. This is too late since you will have limited access to credit with much worse terms than having a good credit score.
Ability to rent a place to live
If you have a lower credit score, it is generally a signal that you might be a riskier borrower. But it can also signal that, as a person, you do not fulfill your financial obligations on time (unless you don’t have a credit history). Regardless of the reason, a low credit score can cause problems when trying to rent a place to live. Thus, maintaining a higher credit score will make your life so much easier. Landlords are checking your credit score, and they avoid renting a house or apartment to people with bad credit scores. Even if you manage to rent a home with a lower credit score, you might be paying higher rent because you pose more risk to the landlord. Keep in mind why you need a good credit score next time you will want to rent a place.
Higher chances of getting approved for credit cards and loans
Having a low or bad credit score means that you have shown inadequate behavior in the past. This behavior is in relation to your financial matters. Thus, lenders are trying to avoid this type of borrower or charge them higher interest rates and fees. Thus, trying to get approved for a loan or credit card would be much easier if you have a good or excellent credit score because you have shown good financial behavior in the past. Again, lenders like to lend money to less risky borrowers. One signal about riskiness is the level of credit score. Keep in mind, though, that credit score is not the only factor lenders look at. A good credit score will enable you to have bigger chances for approval, but other things are considered as well. Things such as income level and debt level, along with the debt to income ratio and/or loan to value ratio.
Get higher limits
Aside from the opportunity to get approved faster, having a good credit score also helps you with the amount approved. Namely, a good credit score with an adequate income level shows that you will pay your monthly payments on time. In addition, it also shows that in the past you have paid the money borrowed on time. Because you pose a lower risk for your lender, and there is a lower probability that you will default, you could borrow a higher amount of loans.
No security deposits on utilities
In some circumstances, your utility company could ask for a deposit. Security deposits on utilities are generally required for people with bad credit history. The deposit might be around $100 to $200. Having said this, you should be aware that a good credit score can eliminate the need for security deposits on utilities. This can come in handy when you want to move. Having a good payment history means that you will not have to tie money as a deposit for utility services.
Better negotiating power
Something you will not have with bad credit. Having bad credit means that you have limited options to borrow money. On the other hand, having good or excellent credit scores gives you negotiation power over the lender. Because lenders want low-risk borrowers, for this reason, you will be able to negotiate better terms. You can negotiate lower interest rates on your loans or credit cards.
Better Insurance rates
Maybe it will come as a surprise for some people, but the level of credit score has an impact on the insurance premium you will have to pay. People with bad credit scores have a higher possibility of missing some insurance payments compared with people with good credit scores. If you have a good credit score, it might be wise thinking to go with the credit report at your insurance company. This can help you to pay a lower insurance premium.
Access to credit
In the long run, or when you need it, not paying attention to your credit score can have consequences in the long run. Although you might neglect your credit score in the present, it can cause adverse consequences in the future. Do not be driven by the thought that you will not apply for a loan in the near future. Therefore, you don’t need to pay attention to your credit score. Think about whether you will need access to credit in the future. Our past behavior will determine our access to credit in the future. Try to keep a good credit score, even though you do not plan to borrow money in the near future. Open the door in the future to access different lines of credit, such as a car loan, a personal loan, a mortgage, or any other form of credit.
Liked it or not, our credit score has a large impact on our financial health. Namely, beginning from the ability to qualify for a loan up to the terms of the loans and the insurance premium we buy. A high credit score could mean easier access to funds and not just any funds, but cash with lower cost. This is in comparison to the cost you would have if you borrowed money with a bad credit score. Although some of us might ignore the importance of a credit score, we should understand that we need a good credit score. It has become an integral part of our society, and various decisions are made on the basis of the credit score category.