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Thursday, February 3, 2011

Importance of a good credit score

Credit scores, also known as FICO scores, are important because they can affect several areas of your life. Since the original use of credit scores as a financial metric, they have been utilized by more and more business entities as an aspect of financial record keeping essential to the practice of lending.

Another reason good credit scores are important is because they have become a part of the group of measurements used to assess an individual's performance in society. Other mechanisms of measurement that serve similar purposes are grade point averages (GPA), standardized test scores, driving record, and criminal history. Before illustrating the effects of credit score in more detail, the video below provides a useful introduction to why a good score is important.


Expensive insurance


The Federal Trade Commission (FTC) and other organizations report insurance companies check credit and use your credit score in assessing monthly premiums. A credit score that is not good increases financial risk to the insurance company which in turn raises insurance costs to compensate for this level of risk.

Denial of service


In some cases, service may even be denied on the basis of poor credit. According to the Privacy Rights Clearinghouse, landlords and mobile phone service providers also look at credit scores. If your scores are bad enough, you may be denied service because your credit score indicates a financial risk and potential loss to a business or organization.

Access to financing


If you have no credit score at all it can be difficult to obtain financing such as auto loans because many lenders require credit scores to make loans. Without a credit score, and particularly a good credit score, it can become an obstacle to achieving the goals you may seek via financing. Having a credit score in this sense is important not just to attain financing, but also to participate in the functions that loans make possible.

Lower interest rates


With a good credit score, typically above 720 on a 300-850 point scale means higher credibility. In other words, if your score is higher than 720, you manage your credit well by paying bills on time, not overextending your credit use and have a good credit history. Good credit scores are more likely to receive lower interest rates on loans such as credit cards, and mortgages.

Employers check credit


Another reason good credit scores are important is because some employers actually investigate credit scores in their background checks. A poor credit score on a background check could lead to disqualification of an employment application or a less competitive application when compared to similarly qualified candidates with higher credit scores. Not all employers check credit score, but the ones that do take them seriously.

Financial responsibility


A good credit score is important for you as an individual because it shows you, if no one else, that you can handle money, including money that is not yours. The financial responsibility that comes with building and maintaining a credit score can last a lifetime and help you avoid financial obstacles that may have otherwise posed a problem for you.

Sources:

1. http://bit.ly/6CdH0K (Federal Trade Commission)
2. http://bit.ly/cdKXJA (Fair Isaac Corporation: FICO)
3. http://bit.ly/c6GOmf (Privacy Rights Clearinghouse)