Credit scores can have a big impact on quality of life. In the United States, a good credit history has numerous benefits. Below, we’ll share key information about credit, including why it’s so important and tips that can help you maintain a healthy credit score.
What are a credit history and credit score?
Before we discuss the benefits of good credit, we'll define credit history and credit scores.
Credit history explained
Your credit history is a detailed record of how you manage your financial obligations. It includes your total amount of debt, number of credit lines, and how you have repaid previous debts (payment amounts and when payments were made)
Every time you open a line of credit (a credit card), take out a loan, or even open an account with a utility service (cell phone, cable, internet, electric, etc), information about the amount of money you owe and how you have handled paying it back is reported to credit bureaus. When you repay your debts in a timely manner, your credit history remains healthy; however, if you make late payments or miss payments, have a suspended account, or carry a large amount of debt, your credit history becomes unhealthy.
Credit score explained
A credit score is a three-digit number that provides a snapshot of credit history. To calculate a credit score, five key factors from your credit history are taken into account. These factors include:
- Length of credit history
- Type of debt
- The total amount of debt
- How you’ve managed to repay your debts
- Any new lines of credit
After assessing these factors, credit bureaus calculate your credit score. Credit scores are defined as follows:
- 800-850: Excellent
- 740-799: Very good
- 670-739: Good
- 580-669: Fair
- 300-579: Poor
How you’ve managed to repay your debts receives the most weight of the five factors taken into consideration when credit bureaus determine your credit score. If you pay your bills in a timely manner, your credit score will be higher. The amount of debt you owe also has a significant amount of weight on your credit score. The less debt you carry, the better. Credit history is important as well; the longer your credit history, the less of a risk you are to lenders. The type of debt you carry (mortgages, car loans, credit cards, etc) and new credit accounts you open also impact your credit score, although they don’t carry as much weight as the other factors.
How your credit history and credit score are used
Your credit history and credit score are assessed whenever you apply for a loan or a new line of credit, or even attempt to rent an apartment or open an account with a utility company. Financial institutions, lenders, landlords, and utility companies need to assess the risk of consumers before providing a loan, credit, or service.
If your credit history is stable, you’ve managed your debts responsibly, and your credit score is high, you will be considered less of a risk. If your credit score is unstable, you haven’t been responsible with your debts, and your credit score is low, you are considered a risk. In other words, your credit impacts almost every aspect of your finances. t can also impact your ability to receive certain services and secure housing, and could even impact your livelihood.
Why having good credit matters
While you can get by with poor credit, doing so probably isn’t going to be easy; it isn’t going to be affordable, either. Establishing and maintaining good credit will make things a lot easier for you for the following reasons.
More financial opportunities
When you have good credit, you’ll have access to more financial opportunities. Financial institutions and credit card companies want to ensure that they are working with stable consumers who have a history of paying their debts back in a timely manner. If your credit history and credit score are healthy, it’s more likely that you will be approved for loans or lines of credit.
On the other hand, if your credit history and credit score reflect poor debt management, your chances of being approved for loans and credit cards will be reduced. In fact, depending on what your history and score are, you may be completely denied.
Lower interest rates
Not only does having good credit make getting approved for a loan or credit card easier, but it also makes it more affordable. When you borrow money or open a line of credit, you are charged an interest rate. An interest rate is an amount of money a lender or credit card company charges for borrowing money. Not only do you have to repay the amount you borrowed, but you also have to pay the interest rate.
The better your credit is, the lower your interest rates on loans and credit cards will be. Lower interest rates can save you a large amount of money in the long run. Conversely, poor credit scores lead to higher interest rates on loans and credit cards and higher expenses.
Consider the following examples based on data from Informa Research Services:
- If your credit score falls in the “very good” range, you’ll spend an estimated $65,000 less on a $200,000 mortgage than someone whose credit score falls in the “fair” range.
- If your credit score is “very good”, you’ll spend about $5,000 less than on a $30,000 auto loan than someone whose credit score is “fair”.
As these examples point out, good credit can end up saving you a substantial amount of money in interest.
Higher loan amounts and credit limits
Not only does having a good credit score improve chances of being approved for loans and lines of credit, but it can help you access to higher amounts of money.
The amount of money you are eligible to borrow is based on two factors: your income and your credit history. If your credit history is healthy, lenders and credit card companies will be more likely to grant you higher loan and credit amounts. When your credit history is in good standing, it demonstrates to banks and credit card companies that you can successfully manage the money you borrow. Therefore, if you have good credit, you may be able to get more money for a mortgage, a car loan, or a credit card.
Better housing opportunities
People with good credit have better opportunities for housing; whether purchasing or renting a property. Home mortgage lenders are more likely to approve a loan if your credit is good; the amount you’ll be approved for may be higher, too. The more money you can borrow for a mortgage, the better home you can purchase.
The same is true for rental properties. Landlords, especially those who manage large communities that offer access to several amenities, usually check the credit history of their applicants. Like lenders, property owners want to ensure that the individuals they are renting to will fulfill their financial obligations such as paying the rent). If your credit is in good standing, your rental application is more likely to be approved for communities located in preferred areas or that offer more amenities.
If your credit history is poor, however, you may not be able to borrow as much money for a home loan. Less money means less choice for real estate purchases. Similarly, you might only be able to access rentals that may not necessarily meet your preferences.
Lower rates on car insurance
Your credit history also affects the price of car insurance premiums. While auto insurance companies cannot refuse coverage because of your credit history, they can charge you more if your credit history isn’t in good standing.
Car insurance companies take several factors into consideration when they calculate premiums, and credit history is one of those factors. If your credit history is poor, it indicates that you irresponsibly manage your financial obligations, which may also indicate that you are an irresponsible driver. As a result, insurance companies will assume you present a higher risk and will charge a higher premium. A healthy credit history means that you manage your finances responsibly and you’re more likely to be a responsible driver. As a result, auto insurance companies will consider you less of a risk if your credit is good, and your premiums will be lower.
No security deposits
If your credit is poor, when you open up an account with a utility provider, you may have to pay a security deposit. Utility providers such as cell phone, cable, internet, and electric companies check the credit history of their consumers to determine whether or not they can expect timely payments. Those who have poor credit are often charged a security deposit to open an account. These deposits ensure that utility companies have access to funds to pay your account in the event that you fail to make timely payments or miss payments. While the expense varies, these security deposits can cost upwards of a couple of hundred dollars.
If you have a good credit score, you probably won’t be charged a security deposit for your utilities. That’s because you are viewed as being responsible and utility companies have more faith that you’ll pay your bills on time and for the total amount due. Not having to pay security deposits for your utilities can save you a considerable amount of money.
Better job opportunities
Believe it or not, your credit history can also impact your ability to secure employment. Employers want to ensure that they are hiring the most qualified candidates. To do that, they conduct extensive background checks, and for some employers, that may include a credit check.
Depending on the employer and the type of work you are applying for, there’s a chance that your credit may be checked. Your credit history tells prospective employers how responsible you are at managing your finances. If your credit score is low, it may concern your prospective employer who may assume that you are less likely to successfully fulfill work obligations, or that you might be a risk for fraud or theft.
How to build or rebuild your credit
As you can see, credit history affects you in a number of ways. Being financially responsible allows you to take advantage of all the benefits that a good credit history provides. If you are just establishing your credit, you’ll want to make sure that you’re building a healthy foundation. If you have a credit history but it’s mediocre, you can work on rebuilding it.
Here’s a look at some tips that you can use to establish, maintain, and rebuild good credit.
Check your credit history
Get in the habit of checking your credit history at least once a year to help you track your rating and find areas where you can improve. Regular checks also help quickly identify and dispute any discrepancies or errors such as late payments that may be recorded but weren’t really late, or accounts in your name that you didn’t open.
Make timely payments
How you manage your debt is one of the factors that credit bureaus consider the most when they’re calculating your credit score. Make sure that you make timely payments on your loans and lines of credit. In addition to making timely payments, make sure that you are paying the appropriate amount. Late payments and payments for less than the amount due can bring your credit score down. Making payments on or before the due date and for the total amount due (or more than the total amount due) can help you build and maintain a good credit score.
Avoid carrying too much debt
The amount of debt you carry also has a significant effect on your credit score. The more debt you carry, the lower your score will be. Avoid spending the total amount of available credit on the cards that you do have. Avoid taking out too numerous loans, too.
The less debt you carry, the less of a risk you are, and the higher your credit score will be.
Consider debt consolidation
If you carry several debts and your credit history is subpar, you may want to consider debt consolidation.
With debt consolidation, all of your debts are grouped together. Instead of making several payments and multiple interest charges for numerous accounts, you’ll only make one monthly payment with a single interest rate. Debt consolidation can make it easier to manage your financial obligations, save you a good bit of money and bring your credit score up.
Avoid borrowing too much money
Every time you open a credit card or apply for a loan, your credit history is checked. These credit checks are considered “hard inquiries” and have a noticeable impact on your credit score, especially if multiple hard inquiries are made around the same time.
Although opening new cards might increase your spending power in the short term, borrowing a lot of money ultimately increases the amount of debt you owe. Since the amount of debt you carry has a big impact on your credit history, avoid applying for too many new credit cards or loans.
When it comes to building or rebuilding your credit, it’s important to know that it does take time. The longer you work on establishing and improving your credit history – and maintain good practices – the better.
How to establish U.S. credit if you have an international credit history
If your credit score isn’t desirable or your credit history doesn’t exist yet, you can make efforts to rebuild or establish it. By responsibly managing your financial obligations, you can achieve a good credit history and take advantage of the multiple benefits that come along with it. Being proactive and making efforts to keep your credit in good standing should always be a top priority.
While you can take the steps above to build good credit, you can also use Nova Credit to access financial products after arriving in the U.S. using your international credit history.
Nova Credit creates a global Credit Passport that helps people bring their credit history with them when they move to the U.S. While your credit history won’t be transferred to national bureau databases, Nova Credit partners with companies to include information from your Credit Passport in application processes to make it easier for newcomers to get approved for credit cards, loans and other products. Once you establish a U.S. credit account using the credit you’ve earned, you can start building a local credit history. Nova Credit currently connects to international credit bureaus in Australia, Brazil, Canada, India, Mexico, Nigeria, South Korea and the UK.
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