Good Credit Equals Lower Interest Rates, Financial Security
We live in a society where financial goals are often tied to credit. Too many individuals, regrettably, misunderstand what credit really is or worse: abuse their credit for short-term financial gain while damaging their long-term financial security.
Credit plays a larger role in our lives than most realize. Good credit means better terms on car loans, home mortgages and credit cards. Bad credit can make it difficult to land the new job we've applied for or get the best car insurance rates.
So what is "credit?" First, credit is not money or even a loan for money, but rather an agreement to repay what is borrowed. The collective records of such agreements and how we honor them is our "credit history." Many companies that extend services on credit report the details of our credit accounts to national credit bureaus. These private companies collect and make available this information so other financial organizations can make informed decisions about lending us money. Once our credit history is collected and written down, it becomes a "credit report."
Our credit report also contains our "credit score," a figure between 300 and 850 that is a numeric representation of the risk we pose to potential lenders as borrowers. The higher our credit score, the better off we are. This score is also commonly known as a FICO score - after the company that developed the score: Fair Isaac Company.
What factors influence our credit? The most important part of our credit report is our payment history. As we make our credit payments on time every month, we improve our score. Late payments damage our score. Then, as we pay down our balances, our score improves. Maxing out a credit card hurts our score. Other factors include the length of time we've had credit (the longer the better), whether or not we're applying for a lot of new credit (which can hurt our score), and how many types of credit accounts we have (variety is good - credit cards, gas cards, mortgage, auto loan, etc.).
Bankruptcy, judgments, suits, liens and wage attachments all damage a credit score and remain on the credit report for 7 to 10 years. And should we fall victim to identity theft, the criminals often open credit accounts that end up on our report. Contact the creditor immediately if you suspect identity theft or errors on your report.
As in medicine, an ounce of financial prevention is worth a pound of cure. Live by a monthly budget, control spending, set financial goals, build an emergency savings fund for rainy days and, if necessary, consult with a reputable credit counselor such as Debt Reduction Services. IHFA's Mortgage Services Department also offers borrower counseling.
Building good credit is neither quick nor easy, but as you use credit wisely, you'll be more likely to get better terms on loans and credit cards.
