What Credit Scores mean to you

A good credit rating is not just about getting a credit card or a mortgage loan anymore, although both of these are great reasons for managing your finances well.

Credit cards have become a way of life for a huge percentage of our society. Several years ago, most credit card users paid their balances off monthly. This is actually the smartest way to use credit. It allows you a great degree of convenience and more flexibility in the timing of your purchases.

Today, most credit card users are paying less than the full balance each month, and often just the minimum payment due. This effectively inflates the cost of the items purchased because of the interest added on each month. In fact, using your credit card to purchase an item on sale usually doesn’t provide any true savings at all.

Having credit and using it responsibly will provide you with a good credit rating. That only comes by paying your bills on time each month, and not borrowing beyond your ability to pay back.

So how good does your credit rating have to be to be “good”? Credit scores range from 300 to 850 and the three major credit bureaus each score your credit according to their own set of criteria. These criteria include: number of credit lines, amount of available credit, amount of credit you have used, length of time your credit lines have been open, monthly payment history, number of late payments, legal judgments, accounts that have been referred to collection, bankruptcies, foreclosures, charge-offs, and settlements.

Also considered is the number of credit inquiries made. Each time you attempt to obtain a credit card, car loan, or mortgage loan, for example, a copy of your credit report is requested from at least one of the three major credit bureaus. Too many inquiries will lower your credit score.

So what’s a good credit score? While each credit grantor has their own set of standards, there are some general guidelines. Most recently we have seen tightening of the guidelines in the mortgage markets. The 100% financing option is no most difficult to find. Most mortgage lenders now want to see credit scores of 680 or above to consider you for low down-payment programs. But you can still get an FHA backed government loan with a score of 575 or above.

The bottom line is the higher your score, the more options will be available to you. And the less expensive the cost of credit means you pay less for the things you buy. A lower credit score will inflate the cost of the credit available to you and therefore the cost of whatever you buy.

The rules regarding credit continue to change. Even if you pay one credit card account perfectly, other companies you have accounts with can check your credit report. If they find you are behind or late on another account, they can increase your interest rate and/or lower the amount of your credit line.

Making matters even more complex is the fact that nearly 80% of credit reports have errors on them, and identity theft is an ever-increasing concern.

A good credit rating is more important than ever. It provides you choices in your lifestyle. Your financial management can affect the kind of car your drive, the home you live in, and even what job you have. Employers are looking at your credit report when they consider you for a new job position. Insurance companies consider your credit in providing insurance quotes.

Beyond these obvious things, good credit positions you better for every aspect of your future; even your eventual retirement.

Poor credit costs you. It costs you time, money, convenience, freedom of choice, and perhaps even a good job. So make good choices, get disciplined, operate on a budget, and pay your bills. Your credit score will reflect these things; and so will your lifestyle.