Throughout your adult life, you’ve likely been bombarded with informational posts proclaiming the importance of your credit rating. Unfortunately, many of these suggestions don’t delve into the real importance of retaining a high credit rating. Do you know what is a good credit score number? Or the difference between secured and unsecured debt? What about the advantages of a fixed vs adjustable rate mortgage loan? Throughout the past several decades, millions of Americans have become dependent on their lines of credit for their financial security. Because of this, it’s even more important that you fully understand how your credit rating and credit reports impact your financial and personal life.
Credit Rating – A Basic Definition
In order to understand the true importance of a credit rating, you need to understand what it is. In the most basic definition, your credit rating is a three digit score delivered by the top three credit bureaus. This score is determined by your financial spending and history. This statistical method of determining your likelihood of paying back money you’ve borrowed is used by credit card companies, mortgage lenders, personal loan lenders and even your cell phone company to determine whether or not you’ll actually repay the money you’ve borrowed.
The determination of your overall credit rating is based upon a variety of evaluation system. In fact, each of the three top credit bureaus calculate this rating according to their own algorithms. Regardless of their specific determining factors, your credit rating is likely created by evaluating your credit payment history, length of credit history, types of credit, frequency of credit inquiries as well as the level of your current debts. The weight of each of these factors can vary; however, all three bureaus call upon this information when determining your overall credit rating.
The Importance of Your Credit Rating
Whenever you apply for a new line of credit, whether this be a mortgage or credit card, your overall credit rating is checked by sending an inquiry to each of the three credit bureaus. Based upon this rating, the financial institution is able to determine your credit risk. The level of this risk determines your interest rates and whether or not you’ll actually repay your debts.
The largest purchase most people will make is the purchase of a home. Therefore it is important to know what credit score is needed to buy a house, and where you fall into that range. The credit score needed to purchase other large ticket items, such as a vehicle, are also stringent, but far less than that of a home mortgage loan.
In the most fundamental sense, if you have a low credit score, credit lenders will want to safeguard their investments by lending you money at a significantly higher rate than someone who has a good credit rating. Therefore, when you have a poor credit rating you’ll actually end up spending more money on a loan when compared to someone with a good credit rating.
Because of this, sustaining a good credit rating will actually save you money in the long-run. In the most serious of cases, if your credit rating is terrible, you’ll actually be turned down by the lender. This can mean you won’t be approved for a mortgage, rental agreement or even a standard cell phone.