Credit

 

Why Credit is Important


Credit and Your Financial Life

You may be suprised to learn how often your credit is relevant in your life.

Credit affects:

Paying your bills late can
lower your credit score
  • Home and car loans: Unless you're fabulously wealthy or related to Donald Trump or some gazillionaire, you will need a mortgage loan to buy a home. Good credit helps you find a lender and get lower interest rates.
  • Education: Bad credit makes it harder to get some student loans. Defaulting on a student loan or a bad payment record can affect your ability to get further student loans if you decide to earn a higher degree.
  • Job: Employers often check your credit when making hiring decisions. Companies look for responsible, stable employees. A bad credit rating doesn't make you look very organized or trustworthy.
  • Renting: Landlords use credit records to make renting decisions. Think about it: If you don't pay your bills on time, are you likely to always make the rent?
  • Insurance: Insurance companies check your credit record for underwriting decisions. Although some states have restricted the practice, insurance companies use credit ratings to determine your rates. People with poor credit records get higher premiums.
  • Utilities: Your credit record can affect your heat, lights, and phone service. Poor credit risks sometimes have to pay extra charges to set up and maintain services with utility companies.

 

Cost of Bad Credit

In major financial transactions, such as buying a home, the cost of bad credit can really add up. Even just a 20 point difference in your credit score can mean higher interest loans and $1,000's of dollar more in costs. Let's look at the example of a 30-year fixed rate mortgage for $150,000. According to the credit information company MyFico.com, a credit score of 640 will net you an interest rate of 6.92%, while a score of 620 will mean a 6.38% interest rate. Over the life of the loan, that could mean paying over $5,000 more in interest!

Source: MyFico.com
Credit Score 30-Year Fixed Rate
760-850 5.35%
700-759 5.57%
680-699 5.75%
660-679 5.96%
640-659 6.39%
620-639 6.94%

 

How Do I Get Credit

If you've ever financed a major purchase, opened up a bank account, or applied for a credit card, you are probably already on file with a credit report and credit score at the three major national credit bureaus, Experian, Equifax and TransUnion. We'll tell you more about them later.

If you have never done anything to establish credit, consider the following steps:

  • Open a checking and/or savings account. It won’t necessarily help you get credit, but will document that you have some money and have put it in a financial institution.
  • Talk to a banker about opportunities to build credit for a mortgage or car loan, and ask about applying for a credit card.
  • A co-signer with a good credit record could help you establish credit by agreeing to pay your debts on a credit card or other type of loan if you are unable to.
  • Look online for credit card applications and information. Sites such as www.credit-land.com, www.creditcards.com, and www.cardweb.com feature credit card offers with details about the types of cards available. Some sites offer tips about getting the best deal and using credit cards to your best advantage.
  • FederalReserve.gov has a wealth of information about applying for credit and your rights under federal law.

Now let's move on to the key to understanding your credit: credit reports.

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