A person’s FICO credit score isn’t something that should be taken lightly. Obtained through a system called credit scoring, it greatly determines the decision made by creditors about whether or not to give you credit. A credit score may also be utilised to determine the terms and rates of credit advanced to you.
The score is arrived at after the evaluation of your credit report. Some of the elements that make their way to the credit report include the number, types, and ages of accounts you hold, bill paying history, whether you pay your bills on time, and the outstanding debt. Creditors then use a statistical program to compare your loan repayment history with that of consumers who have similar profiles.
Generally, the scoring system attach points to every factor that has the capacity to predict the person most likely to repay a debt. The credit score, which is the total number of points, predicts the creditworthiness of a person. Ideally, it represents the likelihood of a consumer repaying debts when they fall due.
Why is a good credit important to you as a consumer? As already mentioned, your score largely determines the decision made by the creditors on whether or not to lend you money. Should a lender decide to advance credit to you, your score will also be used to determine the amount as well as the terms and rates. Some insurance companies also utilise credit reports to anticipate your likelihood of filing a claim and the amount. As such, this information is useful to them when deciding if to grant you insurance, and the premium they will charge. This includes the auto insurance companies. Insurance firms refer to these scores as insurance scores.
Consumers are advised to maintain credit worthiness for various reasons. Below are other benefits that you can reap from having a good credit score:
• It makes it easier for landlords to approve your application for rental houses and apartments
• It gives you more borrowing power. Banks and other financial institutions will find it easy to allow you to borrow more money at lower rates. This is mainly because a good score adds to your negotiating power
• A good credit makes you feel good about yourself – especially if you have had to work extra hard to take your credit score from worse, or bad to good.
Bottom line: while lenders usually consider many factors, besides the credit score, to make credit decisions, a good score makes them perceive you as low risk. Ultimately, you will qualify for many types of loans and credit offers at the lowest rates availed to you.