You’ve found the house of your dreams. It’s time to head to your bank to try and apply for a loan. After spending a few hours at the bank going through the process, you walk away disappointed.
Your credit score is too low for you to get the mortgage. The only way the bank is going to help you is if you can come up with a sizable downpayment. Don’t feel bad.
This happens to a lot of people. Getting a housing loan isn’t the only importance of credit. You can get turned down for a lot of stuff without an outstanding score. Keep reading to learn more.
What Counts as a Good Credit Score?
Before we talk about the importance of a good credit score, let’s discuss what you need to shoot for. Most people consider anything above 670 to be a good credit score. Anything less than that is fair.
If your score ranges between 300-579, that’s a bad score. You’ll need to improve it if you want to be able to take out a loan or do anything substantial.
If you want to go above and beyond, try to get your score in the 700-850 range. It will take a lot of hard work, but as you’re about to see, it will pay off.
1. Lower Intrest Rates
You can’t borrow money without getting hit with an interest rate. It’s a percentage that the lender charges a person for borrowing money. It’s connected to your credit score.
If you’ve got a good credit score, you can get away with paying the minimum interest rate. This gives you more money in your pocket to pay the actual loan off.
2. You’ll Have a Better Chance for Loan Approval
Many factors go into the loan approval process. You could have a 670 credit score and still get turned down for a car loan by Plenti because you have a repo or two on your record.
Lenders want to make sure that you can pay off what you borrow, so they’re going to consider your debt and your current income. This being said, having a good credit score will at least increase your chances of getting the loan.
3. Higher Loan Limits
Even if you have a bad credit score, there’s a chance that you will qualify for a loan. The thing is, you won’t be able to borrow that much.
If you have a history of not paying stuff back, the bank isn’t going to want to give you a lot. Where you could have gotten a credit card with a 1,000 dollar limit, you’re stuck with a 300 dollar one.
You can improve your credit score and renegotiate with the bank later to get a higher limit. If you’ve been diligent about your payments, you’ll have power in this regard.
4. Avoid Security Disposits
You can save a lot of money on the latest cell phone by getting a contract with one of your local cell phone providers. They might not be willing to work with you, though if you’ve got a low credit score.
This will leave you with no choice but to go with a pre-paid phone. The bill each month won’t be that bad, but the initial price of the phone will be murder on your wallet.
It’s either that or put down a sizable security deposit with the cell phone provider. That’s the only way you’re going to get around having a poor credit score.
The same goes for utility companies. If you relocate and you have a bad credit score, you may have to pay a 200 dollar security deposit to open an account with your new local power company.
5. It Will Be Easier to Rent a House or Apartment
Speaking of relocation, renting a house or an apartment can be a bit difficult if you have a low credit score. Many landlords run a financial background check before they’ll hand you the keys to a place.
This includes looking over your credit history. If you have a low score that was caused by a previous eviction or missed rent payments, it will hurt your chances.
How to Build a Good Credit Score?
Now that you know the importance of credit history, the question is, how do you build it? If you haven’t taken out a loan or credit card, you’re not on the board yet, and no credit can be as damaging as bad credit.
Lenders need something concrete to go off of if they’re going to approve you for anything. Here are a few small ways you can build your credit that is relatively low risk.
Secured Credit Card
The easiest way to build up your credit history is by getting a secured credit card. You’ll make a one-time cash disposit on this card. This disposit will determine your spending limit.
You can use this credit card the same way you would use any other. Get whatever you want as long as you can make the minimum payments.
When choosing a secured credit card, you want to make sure that it sends reports to Experian, Equifax, and TransUnion. This will ensure that you actually build a credit history by keeping up with your secured card.
Use a Credit Builder
There are credit builder loans that do pretty much as advertised. It’s a loan that you take out with the intention of building your credit history with it.
Once you take out the loan, it won’t go into your bank account until you pay it off. Another option is to get a secured loan with your bank. The interest rate will be pretty high, but if you can make regular payments, it will have a positive effect on your credit score.
Ask Someone to Be an Authorized User
If you can trust a person to make regular payments on their credit card, you can ask them if they can make you an authorized user. By doing so, it will put the card’s payment history on your credit.
That’s why we said that you should only do this with someone you trust. If they go wild with the card and don’t make their minimum payments, it will hurt both of you.
Pay Your Bills
Some rent-reporting services will allow you to build your credit by simply paying the bills that you’re already paying.
Keep in mind that not all of your utility bills will work this way, but enough of them should where it will make a significant difference to your credit report.
Improve Your Credit
Let’s say that you do have a history, but that history is bad. Until you take a minute to improve your score, you’re not going to be able to get a loan or do much of anything.
Check for Errors
The first thing you should do when you’re turned down for a loan is to check your credit report. If someone’s taken your identity and run wild with it, there may be some debts that you don’t recognize.
You’ll be able to dispute these inaccuracies and maybe even get them taken off your record. If this happens, your credit score should jump up.
Pay on Time
Even if you’re only a few days late on a payment, it can hurt your credit score. If you do have any missed payments, get them current as soon as you can.
That goes for your debts that are in collections as well. Paying them off won’t get them off your credit report, but it still helps.
If you’re having trouble paying, contact the loan company. They would rather work with you than send your bill to collections. They might be willing to negotiate lower payments during your hour of need.
Reduce Your Debt
The next step is to reduce your debt. Sit down and look at what you’re dealing with. You can either tackle the smallest loan or concentrate on knocking out the one with the highest interest rate. Both will do wonders for your score.
Do your best not to take out a loan to tackle another loan. This will put you further down the debt rabbit hole. You also shouldn’t close a current credit card to reduce your debt.
The True Importance of Credit
What is the importance of credit? Without a good score, you won’t be able to get a house or take out a loan for the things that you need.
The good news is that there are ways to fix your score if it’s on the low side. Take the time to pay off your debts and use a secured loan to build your credit. Visit our blog for more ways to sort through your finances and get started with patching up your score.
