Picture your best friend asking you to lend him $500. When the check leaves your hand, you feel a pang of worry because ... you really need that money back! That gets to the heart of lending. Any loan is a risk, so most people would do it only for those they trust.
When you apply for a credit card, a car loan or a mortgage, the lender has similar concerns. A credit score is one objective measure that helps lenders decide how likely a borrower is to repay the loan — with on-time payments. If your credit score is high, that’s an indication that you are responsible with money and lending the money to you is less risky.
Enough about the lender. What about the borrower?
For borrowers, a high credit score can potentially translate into a lower interest rate and a larger line of credit. Over time, that can add up to a big difference on your bottom line.
When you buy a house, even a fraction of a percentage on your interest rate can make a big difference. On a $200,000 mortgage, the difference between an interest rate of 5 percent and 5.25 percent is $30.77 a month. Over 30 years, that adds up to just over $11,000. That’s the power of compounding interest.
Even if you’re years away from buying a house, a credit score can affect other areas of your life. Landlords, employers and insurance companies may also do a credit check to gauge how responsible you are. Credit scores can affect insurance rates, where you live and what kind of job you can get.
What affects your credit score?
First, it’s important to understand what goes into a credit score. For a complete breakdown, visit MyFico.com. Rebuilding or establishing credit can seem daunting, but with these best practices, you could increase your score and improve your chances of getting a low interest rate.
Making on-time payments. Bills 30 days past due and accounts that are sent into collections are two things that could lower your credit score.
Minding your balance. If you are using a credit card, a low balance is one factor that could raise your credit score. If your balance is higher, keep it away from the credit limit and make higher- than-minimum payments.
Choosing new accounts carefully. Opening a new account results in a credit inquiry, which can be reflected in your credit score.
Not being quick to close. If you have several credit accounts, it may seem like a good financial move to clean house and close accounts you no longer need or want. Unless they have an annual fee, keep them open because the age of your credit is also a factor.
Keeping an eye on your reports. Credit holders are entitled to one free review per year of their credit reports. To keep a good handle on your credit health, schedule a reminder to review once every four months. If you see any mistakes, report it immediately.
Choosing your bank wisely: When someone opens an account in your name, it can take years to undo the damage and clear your name. It can pay in the long run to choose a bank that offers you the resources to help protect your credit. Minnwest Preferred Checking comes with IDProtect, a protection service that safeguards your identity with total identity monitoring, and you can access your credit report every 90 days.
Whatever your stage in life, your credit score can make a big difference in your financial future.