The Impact of Credit Scores on Your Financial Health

To understand the impacts of credit scores on your financial health, you need to know what credit score is.

What is a Credit Score?

The credit score is shown in basically three digits, ranging between“0-999”. It is used to check the borrower’s history before lending the value to know whether the person or company can repay the debt. Also, it is important for lenders such as credit companies or banks to fix the interest rate and credit limits. If a person or company has a higher credit score, there is a lower risk of lending money to repay debts. The most commonly used credit scoring models are FICO and VantageScore.

So, understanding credit scores means understanding the impact of credit scores on your ability to secure loans, the interest rate you receive, and your financial growth.

The Ways Credit Scores Affect Financial Health-

1. Loan Approvals and Interest Rates: Lenders analyse credit scores before approving loans and offering interest rates. Higher credit scores lead to approvals of bigger loans and lower interest rates on mortgages, auto loans, and personal loans. On the contrary, a lower credit score leads to higher interest rates and loan denial.
2. Credit Card Benefits and Limits: Credit issuers approve credit cards and determine credit limits for borrowers based on their credit scores. With a higher credit score, you may get opportunities to access premium credit cards with lower interest rates, higher limits and rewards programs. On the other hand, a lower credit score may lead you to get a subprime credit card with high interest rates, lower limits, and less beneficial offers.
3. Renting a Home: Often, landlords check credit scores before handing over their homes to tenants. A person with a good score is considered a reliable tenant. If your credit score is low, you will have problems getting homes for rent. You may need to pay a high security deposit or find a cosigner. This is the most important impact of credit scores on your financial health.
4. Employment Opportunities: In some job vacancies, employers check candidates’ credit scores, especially when the job positions are related to financial departments. At that time, negative issues or lower scores in your credit history may directly affect your opportunities to get the job.
5. Insurance Premiums: To get an affordable auto and home insurance policy premium, you need to focus on your credit scores. Because insurance companies sometimes determine premiums based on credit scores. They may consider a lower-scoring credit card holder as a higher risk customer.

Steps to Improve Credit Score

If your credit score is lower than the ideal, there are steps you can follow to improve it.

1. Timely Payment: Try to pay your bills on time. To avoid late payment, you can use phone reminders or automate payment options.
2. Reduce Credit Utilisation: Try to keep your credit card balances lower than your credit limits. You should not use more than 30% of your credit limits.
3. Follow Up on Credit Reports: Check your credit reports regularly from the free website Annual Credit Report and dispute any inaccuracies.
4. Limit New Applications: You should not apply for multiple credit accounts quickly. It will negatively affect your credit scores. So, without an emergency, don’t open new accounts.
5. Maintain Old Accounts: A long-term, sustained account positively impacts your credit history and increases your credit scores. So, try to keep your older credit accounts open.

A good credit score is the reason for your good financial stability. It can make everything easier for you, including renting a house, taking loans, getting job opportunities, etc. Monitoring your credit reports regularly and taking proactive steps to improve your credit scores can make your future easier to have strong financial stability.