Personal Finance

Why Credit Matters – Learn How to Build Credit

Do you know your credit score? Your credit is an important number to keep track of.

People often ask, why credit matters? It is important to understand why credit matters and what you can do to have good credit. Credit is a key indicator of your financial profile.  Your credit history gives lenders an overview of your spending habits and how quickly it takes you to repay money lent to you.  

You can easily get a free credit report for yourself and get a complete breakdown of your credit profile. Having a good credit score can help determine if you get approved for an apartment, an auto loan or an insurance policy.  

Building a good credit score is easy

Although credit cards can lead to financial ruin for some people, they can be used as a very powerful financial tool for others.  David Ramsey might argue with this logic, but leveraging credit cards to build your credit score will prove to banks that you are responsible with your money.

Why credit matters - comparing credit cards
Why credit matters – the benefits of maintaining a healthy credit score.

By showing banks that you are accountable for yourself and pay your bills on time, banks will be more willing to give you a loan in the future with favorable rates. When you stick to paying your bills on time, you will get a better understanding why credit matters. You will benefit from a rising credit score to reward you for your good credit behavior.

Why credit matters when you are making purchases

During the early stages of your personal finance life, you need to remember to keep your credit card spending low so you can mange to repay the creditors on time.  If you forget to pay your bills on time, you will be hit with late fees which will start to add on to the principal of your statement and accumulate with interest.  

Be sure to check up on your credit score regularly each year to stay on top of any changes to your score and to verify the information is accurate.  Monitoring your score will prepare you ahead of time if you decide to apply for a loan or refinance your mortgage for example.  

How credit card companies make money

Why would anyone want to give you money for free? 

That’s right, they wouldn’t. 

Credit card companies make their money in multiple ways: transaction fees and interest rates.  When you swipe credit cards at local stores or merchants, credit card companies like Visa, American Express and MasterCard charge a transaction fee (usually 2-3%) for using their credit card to make your purchase. 

In addition to that, if you are late with your credit card monthly payment, you will receive additional fees on your statement. Creditors make a killing on late fees because people are not fully aware of all terms and conditions before signing up for their credit card.  

Do not rely on one credit card

It is good to diversify your credit card spending on to multiple credit cards if you are able to. Having two or more credit cards will give you the ability to use a secondary card in case you have a high-spending month on the first credit card. This might not seem helpful, but it actually helps your credit score.

It is recommended to keep spending to roughly 60-70% of your credit limit, rather than maxing out your credit card limit. When you max out your credit card, this raises flags to the credit card companies.

Tracking your credit card expenses

Challenge yourself to start tracking every single expense you have on each credit card.  Tracking your expenses throughout the month can have a big impact on your personal finance by simply making your spending habits visible to you. Spend wisely and keep expenses reasonable based on your needs.

It’s not fun, but tracking your expenses it very effective. If you take a look at what you spend your money on and how you use your credit card, you will start to make adjustments based on your common behaviors. It will give you a better idea where your money is going and give you more detailed information on how often you swipe your card.

There are many mobile apps like Acorn and Mint that allow you to track your expenses, track your income, and stay on top of your personal finances which will help you save money overall.

Pay your credit card bills on time

Unfortunately, thousands of Americans suffer many different kinds of debt. Student loan debt, medical debt and credit card debt as well. Credit card debt has crippled Americans with high interest rates that force people into financial struggles.

In fact, Americans are expected to fall behind on their credit card bills more often than not due to the current economy. Growing credit card debt has forced consumers to find alternatives to finding credit like payday loans and cash advance programs. Be sure to pay your credit card bills on time to avoid having to take out any other loans unless necessary.

Why Credit Matters When Getting a Loan

Although payday loans might be helpful to get you out of a bind, keep in mind that these types of loans come with higher interest rates than a personal loan. The interest rate you might pay on a payday loan or personal loan will vary based on your credit score, your occupational income and family situation. Comparing loans carefully is important so you can find favorable rates to help you climb out of financial struggles.

How credit effects you and why credit matters

Keeping your credit score in healthy condition can lead to many different benefits for you. If you can get a grasp on why credit matters and how you can build your credit, you will find ease in your financial journey.

When you build up a strong credit score, lenders will be more flexible and more willing to extend loans with favorable rates based on your good credit history. With a good credit history, lenders will have more confidence in giving you money and will trust you can repay the loan.

Credit can also help you get approved for an apartment rental in a similar way. Having a good credit score will give your landlord confidence that you can pay your rent every month on time.

It’s smart to check your credit score regularly using tools like CreditKarma so you can maintain a healthy score without any surprises. It is also smart to pull your credit score before applying for a loan to an apartment lease so you know how your financial profile looks ahead of time.

Using credit to your benefit

There are many different factors to consider when deciding when to use credit. Credit can be used to your benefit and help you get through tight situations.

Building a good credit score enables you to secure favorable loan rates which can save you a ton of money over the course of a 30-year mortgage. Having a strong credit score gives potential home buyers an advantage when applying for a mortgage and gives the lender confidence that the borrower will repay the loan on time.

Using credit for lower interest rates

Another reason why credit matters are the benefits good credit comes with. When you have a good credit score and your lender has confidence in your ability to pay your loans, you can negotiate lower interest rates on your loan. This gives you lower monthly payments along with more favorable interest rates. When a lender knows you have a good credit score, you can shop around your loan requirements to see which lender will offer you the best rates.

A potential borrower with a good credit score has leverage and it is in their best interest to speak to multiple loan options before deciding between which to choose. Things to consider when accepting loan terms include the principle loan amount, the interest rates and the amount of years you have to pay the loan back.

Using credit to borrow more money

Good credit score gives the borrower leverage and can be used to request more money from a lender. The amount of money you can be approved for is dependent on your income, debt and credit score. Having a good credit score indicates that you are responsible with your money and shows the lender that you are going to pay back your loan terms.

When a potential borrower has a good credit score, he or she has the ability to secure larger loan amounts due to the credibility he or she has earned. Good credibility takes time to earn but when you gain the trust of big banks and lenders, you can use your credibility to your advantage by borrowing larger amounts of money at lower interest rates.

Avoid security deposits

Maintaining a good credit score can also be used to avoid putting down any security deposits on any utility services when moving into a new apartment. Saving a few hundred dollars during a new move can be very helpful for anyone. It goes to show you how having a good credit score can help save you money.

Using credit to lower your bills

You are able to negotiate your car insurance policy and lower your monthly premium if you have a good credit score. Insurance companies have found with data driven research and machine learning, drivers with lower credit scores tend to file insurance claims more often. Due to this common trend, drivers with higher credit scores tend to have the ability to negotiate lower rates than a driver with a lower credit score.


4 comments

Leave a Reply

%d bloggers like this: