You may not yet realize how important credit scores are if you have never needed to show yours when making a major financial decision.
You might think that your score only affects you when you are applying for an apartment or home loan. However, the reality is that it carries weight in numerous other areas of your life as well.
Once you understand how your score affects your finances, you can take the necessary steps to learn how to improve your credit score. The sooner you begin working toward improving your credit score, the sooner you can accomplish life goals that you have put on the back burner due to fears about your credit. The sections below illustrate three ways that your credit score impacts you.
When you have a low credit score, you may have higher monthly bills than someone with a higher score. Lower numbers indicate to companies that you may be irresponsible with your money. Thus, they are reluctant to work with you. If they do work with you, they are likely to charge higher interest rates or impose additional fees due to your score. For example, if you apply to rent an apartment with a subpar credit score, the security deposit required may be larger. You may have to pay several hundred more dollars upfront than someone with a number in the high credit score range.
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When you apply for a loan, whether it is a car, mortgage or personal loan, the lender will pull your credit score to determine how responsible you are. In some cases, you may be turned away. Other lenders will agree but give you an offer with unfavorable terms. For example, you may be required to put down a large security deposit, pay higher interest fees or purchase mandatory insurance. Anyone from your landlord to your cellphone carrier may use your score to determine what fees and interest rates to charge you.
For residents with low credit scores, additional charges can snowball into a major long-term financial mess. Typically, a low score is a result of financial struggles. If you must pay higher fees due to a low credit number, you might be struggling to make ends meet. You might begin relying on credit cards for regular purchases. Additionally, your credit cards are likely to have extremely high interest rates because of your score. This creates a vicious cycle in which you fall deeper and deeper into debt, making it difficult to improve your financial situation and fix your credit score.
The necessary credit score to buy a house is usually 580 and above. This score directly impacts your ability to afford a home for several key reasons. If you need a mortgage and you have a low credit score, you are less likely to receive loan approval. Even if you are seeking a rental property rather than buying a home, your inadequate score can still affect you. Prospective landlords will check your credit score to determine if you are a reliable and trustworthy tenant. A low score can be a red flag and result in a landlord turning you down.
In some cases, low credit scores can prevent you from purchasing a home altogether. Generally, if your credit score is below 580, you will struggle to find a lender willing to approve your mortgage request. Even if a lender is willing to grant you a mortgage, your interest rates will be higher than someone with a better credit score for a loan. That means even after you struggle to find a lender to approve your mortgage, you may still not be able to afford the terms offered to you. If you have higher interest rates due to a low score, you could end up paying thousands of dollars more over the lifetime of the mortgage.
If you have a low credit score, you may find it difficult to access funds or open new credit card accounts. When you apply for a credit card, the credit card company will pull a copy of your full credit report. If your report indicates that you currently carry a lot of debt, have defaulted on loans in the past or regularly miss payments, you may be rejected.
The longer you carry a balance on your card, the more difficult it will become to make purchases. When you only have a small amount of credit remaining, it is not advisable to spend any more as you could damage your credit score further. Credit scores are calculated in part by determining how much credit has been used. When you use too much of your available credit, your credit score dips even lower. A number in the 600-700 credit score range is considered average. Maxing out your credit cards can drop your score below this range.
Your credit card lender may decrease your credit limit if you are continuously carrying a high balance on your account. If you do not regularly check your credit score and spending limit after this occurs, you run the risk of maxing out your credit card. Then, you will likely face repercussions if you do not fix your credit score or change your spending habits. In some cases, credit card companies may even cancel existing cards you have open. As a result, you may have trouble paying for items each month, such as utility bills and groceries you may normally charge to the card.
However, you might be able to qualify for low credit score credit cards if you are unable to obtain a credit increase. These types of cards are known as secured cards. Borrowers looking for answers on how to increase a credit score should consider applying for this type of credit card. A secured card will help you rebuild your score by limiting your credit to the amount you submit as collateral. Thus, it will be easier to make timely payments.
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