What is Credit and Why is Your Score So Important to Everyday Life?

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Credit instills a different feeling in everyone that hears it. You either conjure up images of plopping down a card at a register knowing you can get what you need now and pay later or you picture a big stack of bills in the corner that you don’t want to open. Depending on your past or current standing Credit is either a saving grace, something you are proud of, or a dirty word that makes you feel uncomfortable and uneasy. Credit itself doesn’t have feelings or thoughts. It doesn’t care about anything. Credit is just an ability to obtain goods and services before payment with the faith that payment will be made in the future. However, the people that lend and extend that credit to a consumer do have thoughts and feelings and concerns about whether you will make that future payment. Being in good credit standing affects many things in a person’s day to day life and how much that person is going to pay in the long run.

There are two types of credit that is extended to the consumer. They are Installment and Revolving lines of credit.

Installment and Revolving lines of credit.

Installment loans are a set amount of money loaned for a specific purpose. Installment loans generally recur monthly at the same payment on a set date. The biggest installment loans are autos, mortgages, boats/recreational vehicles and student loans.

Revolving credit is a line of credit that the consumer can keep using for any purpose as long as you’ve paid the balance due. The balance due is based on what the consumer has purchased throughout the month. That balance will be determined dependent on the interest percentage set by the lender. Credit and department store cards are the most common types of revolving credit.

Any credit extended to a person will be accompanied with an Interest Rate. Interest rates are the costs of borrowing. The lender charges a percentage of the daily balance and apply this cost to the monthly bill. Depending on their faith in you to pay back the money borrowed, this rate can be low to extremely high.

This is why having better credit is so important!

Owning your own home is one of the most important investments a person can make for their financial future. However getting a loan for a mortgage can be extremely difficult and extremely costly if you don’t have great credit. Based on recent mortgage rates a person with poor or even fair credit with a 30 year fixed rate loan will be quoted an interest rate of 5.481%. With excellent credit that same person would be given an interest rate of 4.025%. That seems like a small difference but the savings do add up. On a house mortgage of 200,000 dollars, the person with poor or fair credit will end up paying 175 dollars more a month and 63,173 more dollars over the course of the loan.  Poor or even fair credit will mean you will need to put more money as a down payment and pay a much higher interest rate. Over the course of a mortgage this costs you thousands of dollars that you could be saving if your credit was better. Even if you aren’t trying to own your own home, bad credit can lead to being turned down by renters or cost you a heftier deposit. The same is true for buying a new car. If your credit isn’t great you may be turned down for the loan or end up needing to come up with a higher down payment. In 2017 a person with excellent credit averaged an interest rate of 5.48% where as someone with fair to poor credit averaged an interest rate of 16.27%. With a purchase of a 21,000 dollar vehicle over the course of a 72 month loan the individual with less than excellent credit ends up paying 116 dollars more a month and 8,355 dollars per year.  Over the course of your loan you will pay thousands more than the vehicle is worth due to higher interest rates.

Your insurance company will also take into factor your credit score which in turn will affect your premium rates. In some states, an  individual with poor credit pays anywhere from 200 dollars a month up to double than an individual with excellent credit but the same driving record.

The difference in good credit or bad credit

The difference in good credit or bad credit can mean saving hundreds or even thousands of dollars when applying and having a credit card as well. When you have poor credit you end up paying higher interest  rates and annual fees than a person with excellent credit. That’s all money that you could be putting to better use elsewhere.

Having good credit means you have borrowed and paid back money regularly and on time in part or in full. Bad credit means you have borrowed but failed to pay back the minimum required on time or not at all. These negative marks can affect your credit score for up to 7-10 years.

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