Consumer Credit: Five Reasons to Have a Good Credit Score
Your credit score basically predicts the possibility that you won't pay your bills. Creditors figure that the higher your credit score, the less likely you are to miss payments. Most credit scores on based on the Fair, Isaac & Co. model, known as FICO scores. But why is your credit score important? A recent article by Kiplinger's Personal Finance Magazine explains who relies on that score:
1) Lenders. Most people would expect lenders to look at their credit scores, and indeed they do. Your credit score affects the rate you pay on your mortgage, your car loan and your credit cards.
2) Insurers. You may wonder why insurers would charge a higher rate for insurance just because you may not be so reliable in paying your bills. Yet most car insurance companies and many home insurance companies view your credit score before deciding your insurance rate. The difference in a good score or a bad score can make a huge difference in how much you pay for insurance.
3) Landlords. A low credit score may not result in a higher monthly rent, but it may require you to have a co-signer on your apartment lease or to make a bigger security deposit.
4) Employers. You must give your permission for a potential employer to pull your credit score, but 35% of them will do so if you give your okay. Why? Bad credit can be a sign of irresponsibility.
5) Cell phone companies. Again, they want to be sure you're responsible before they finalize your contract.
How do you improve your credit score? According to the article, the two most important factors--counting for about 2/3 of your credit score--are paying your bills on time and having available credit. Paying your bills on time seems obvious, but many people don't realize how severely a few late payments can hurt their credit score. Having available credit means you should never max out your credit cards. You shouldn't use more than 30% of the available credit on any card to get the maximum benefit.
Even people with poor credit or no credit--like college students--can improve. If you're a college student, limit yourself to one credit card and pay it off in full each month. If you're having credit problems and want to re-establish your credit, consider a "secured" credit card, that will require a deposit of $300 to $5,000. You can improve you credit significantly by making timely payments on a secured card, just the same as a regular credit card.
