A person’s FICO credit score is not something to be taken lightly. Obtained through a system called a credit score, it largely determines the decision creditors make about whether or not to grant you credit. A credit score may also be used to determine the credit terms and rates advanced to you.
The score is arrived at after evaluating your credit report. Some of the things that make it to your credit report include the number, types, and age of accounts you have, bill-paying history, whether you pay your bills on time, and outstanding debt. The creditors then use a statistical program to compare your loan payment history with that of consumers with similar profiles.
Typically, the scoring system assigns points to each factor that has the ability to predict who is most likely to pay a debt. The credit score, which is the total number of points, predicts a person’s creditworthiness. Ideally, it represents the probability that a consumer will pay his debts when due.
Why is good credit important to you as a consumer? As already mentioned, your score largely determines the decision creditors make about whether or not to lend you money. If a lender decides to advance you a loan, your score will also be used to determine the amount, as well as the terms and rates. Some insurance companies also use credit reports to anticipate your likelihood of filing a claim and the amount. As such, this information is useful to them in deciding whether to give you insurance and the premium they will charge. This includes auto insurance companies. Insurance companies refer to these scores as insurance scores.
Consumers are advised to maintain creditworthiness for several reasons. Here are other benefits you can get from having a good credit score:
• Makes it easier for landlords to approve your rental application for houses and apartments
• Gives you more borrowing power. Banks and other financial institutions will find it easy to let you borrow more money at lower rates. This is mainly because a good score increases your bargaining power.
• Good credit makes you feel good about yourself, especially if you’ve had to work harder to get your credit rating from worse or bad to good.
Bottom line: While lenders generally consider many factors in addition to credit score in making credit decisions, a good score makes you perceived as low risk. Ultimately, you’ll qualify for many types of loans and credit offers at the lowest rates available to you.