Importance of a Good Credit Score

Credit scores, also known as FICO scores, are important because they can affect several areas of your life. Since the original use of credit scores as a financial metric, they have been utilized by more and more business entities as an aspect of financial record keeping essential to the practice of lending.

Another reason good credit scores are important is because they have become a part of the group of measurements used to assess an individual's performance in society. Other mechanisms of measurement that serve similar purposes are grade point averages (GPA), standardized test scores, driving record, and criminal history.

• Expensive insurance

The Federal Trade Commission (FTC) and other organizations report insurance companies check credit and use your credit score in assessing monthly premiums. A credit score that is not good increases financial risk to the insurance company which in turn raises insurance costs to compensate for this level of risk.

• Denial of service

In some cases, service may even be denied on the basis of poor credit. According to the Privacy Rights Clearinghouse, landlords and mobile phone service providers also look at credit scores. If your scores are bad enough, you may be denied service because your credit score indicates a financial risk and potential loss to a business or organization.

• Access to financing

If you have no credit score at all it can be difficult to obtain financing such as auto loans because many lenders require credit scores to make loans. Without a credit score, and particularly a good credit score, it can become an obstacle to achieving the goals you may seek via financing. Having a credit score in this sense is important not just to attain financing, but also to participate in the functions that loans make possible.

• Lower interest rates

With a good credit score, typically above 720 on a 300-850 point scale means higher credibility. In other words, if your score is higher than 720, you manage your credit well by paying bills on time, not overextending your credit use and have a good credit history. Good credit scores are more likely to receive lower interest rates on loans such as credit cards, and mortgages.

• Employers check credit

Another reason good credit scores are important is because some employers actually investigate credit scores in their background checks. A poor credit score on a background check could lead to disqualification of an employment application or a less competitive application when compared to similarly qualified candidates with higher credit scores. Not all employers check credit score, but the ones that do take them seriously.

• Financial responsibility

A good credit score is important for you as an individual because it shows you, if no one else, that you can handle money, including money that is not yours. The financial responsibility that comes with building and maintaining a credit score can last a lifetime and help you avoid financial obstacles that may have otherwise posed a problem for you.

Sources:

1. http://bit.ly/6CdH0K (Federal Trade Commission)
2. http://bit.ly/cdKXJA (Fair Isaac Corporation: FICO)
3. http://bit.ly/c6GOmf (Privacy Rights Clearinghouse)

How to keep your good credit score

After working to get a credit score to its best numerical value i.e. between 735-850, keeping it there may also require some maintenance. Keeping a credit score high shouldn't be a challenge so long as one continues the techniques and methods one used to get the credit score high in the first place. There are also a few ways to prevent a credit score from lowering that are not related to strong management of personal finances.

Image source: Phillip Newton

Maintain less than 40 percent usage of credit

Individual debt management decisions also affect credit score. Moreover, the lower the percentage of debt one uses, the more debt management credibility one may achieve in the form of a high and maintained credit score. If one has a high credit score then uses the maximum debt for all one's credit the affect could be lower credit score. Paying as much of one's monthly credit card bill as possible not only helps maintain ideal credit levels, but also indicates a willingness to pay down debt to creditors.

Stay with financial institutions and creditors

How often a debtor switches and closes financial institutions indicates a potential strike against credit worthiness. Sticking with financial institutions and lenders demonstrates debtor may be less likely to engage in risky financial behavior based on statistical correlations and data. So if one must close an account, finding a new financial institution one can feel comfortable banking with over the long term can be a healthy choice for one's credit score.

Avoid frequent credit checks

A credit check from a lender once in a while shouldn't hurt a credit rating however frequent credit checks can indicate a sudden need and application for credit which could adversely affect a credit rating and/or credibility. By spacing out car loan, credit card, mortgage refinance, and individual business loan applications, the chances multiple credit checks will lower a credit score go down. Additionally, avoiding too many comparison related inquiries can also be helpful. For example, if shopping for a credit card one may require pre-approval, too many credit card inquiries could have a negative affect even if one just wants one credit card.

Keep good financial habits

The same financial habits that enabled a debtor to achieve a high credit score must be continued in order to keep the credit score high. The typical practices that contribute to strong credit scores are listed below:

• Budgeting
• Debt Management
• Pay bills on time
• Reasonable Debt to Income ratios
• Credit History

The above methods require ongoing fiscal discipline, know how, financial record keeping and organization skills. Maintaining a cost of living and standard of living in proportion to one's income level is also a good idea in avoiding an over accumulation of debt. Making extra mortgage payments and paying taxes on time can also have an influence on financial credibility.

Protect financial information and identity

Lowering the risk of identity theft can also assure a credit score is less likely to be compromised. Shredding old and unneeded financial documents, obtaining credit freezes during periods of loan inactivity, reviewing credit reports once or twice a year, and removing one from marketing, and credit card distribution lists can all be helpful ways to protect identity. Other techniques include using license numbers instead of tax payer identification numbers at doctor's offices and other places where TIN's are not necessary, changing computer passwords often and using data encryption, firewalls and spyware protection on computers.

Avoid overdraft and bounced checks

Another way a credit score may be affected may be from writing checks that bounce or make use of overdraft protection. Bad checks are reported to credit agencies and although overdraft protection is technically a line of credit, it can incur financial penalties and may also be reported to credit agencies depending on the financial institutions practices.

Keeping a credit score high has several potential benefits including qualification for lower interest rates, higher loan qualification amounts and beneficial background screening for job applications that require good financial credibility and credit scores. Additionally, the satisfaction of knowing one has make a solid and consistent effort in maintaining a deserved credit score can be of personal benefit.

A high credit score can also be useful in unexpected times of low cash flow and when additional credit is required for large expenditures and/or investments. Whether it be personal or business related, be able to qualify for low interest credit and or loans an assist one in realizing one's dreams so long as they are well managed.