Why is Good Credit So Important?

If your financial goals include major purchases, you'll probably need to take out a loan. Most people don't have $100,000, or even $15,000, at one time, so instead, we borrow the money, and pay it back over time.

Your lenders are interested in one thing: how reliably you will pay them back—your financial future. Your financial history shown in your credit report helps lenders judge your future. Your credit report may determine whether you can get a loan, and how much the loan will cost you.

If you're worried that your financial history doesn't really reflect what you believe your financial future looks like, just remember this:

Your financial future begins today.

You can't erase the past, and your past can remain on your credit report for years. But, you can demonstrate good habits starting today that can show lenders that your financial future is a bright one.

Why is Your Credit Score So Important?

• It's used by lenders, insurance companies and even potential employers and landlords, to help them determine whether you are financially responsible.
• When you're opening new accounts (even phones or utilities) a bad credit report can mean that you will have to make a large deposit in case you stop paying your bill.
• A bad credit score indicates that you are more risky that other potential borrowers. This can lead to:
  • Higher Fees and Rates
  • Being declined for new accounts
  • No credit line increases
  • Being rejected for jobs or apartments or insurance

How a good FICO score can save you money: The higher your score, the less you may be charged for a loan. See this example of the monthly payments on a 48-month, $10,000 used car loan. If your score is below 590, you may have to pay an extra $40 every month in interest, compared to someone with a score of at least 720. That can add up to an extra $1,910 in payments over the 4 years. [SOURCE: Bankrate.com, based on average rates for a 48-month used car loan in NY May 2006.]

Your Credit Score

Your credit score may be the single most important number in your financial life. It's going to be a major factor in whether you can get a loan or credit card, and if you can, what rate you'll be given.

What's a credit score or a FICO score?

Your credit score is a number that is created based on information in your credit report (see section on credit report). The most common type of credit score used today is called a FICO score and scores range from 300 to 850. Your FICO score is updated monthly and can change when companies report information about you to the credit bureaus. If a credit report is a "financial report card," a credit score is similar to your final grade. Although creditors are not required to use the FICO score, most do use FICO and their own internal scores.

What is a "good" score?

Almost 75% of the U.S. population with scores have a score of 650 or above. Another 50 million Americans have no score at all. That means that about 74 million Americans have no score or a score below 600. In general, though, the higher your score the better. The lower your score, the more you will likely be charged through higher fees and/or higher interest rates. To get better rates, your score should be above 720.

What goes into a FICO Score?

FICO scores are figured out using a very complicated formula. These are the major factors and about how much they weigh in calculating your score: