The Importance of Building Good Credit

July 18, 2014 | by Justin Capetola

good credit

Credit history is one of the most important aspects of a person’s financial life. Your credit history is the driving force behind the ability and cost of obtaining a mortgage to buy a home, financing the purchase of a new car, securing a loan to start a business, or simply obtaining a credit card. A credit report, or credit score, is the primary report that any money lender (bank) or credit grantor (credit card company) will use to determine if it will lend money and the terms in which the money will be lent. The better credit score a person has, the more favorable the terms for borrowing money will be.

Good credit can make financing easier and less expensive. Many people will eventually purchase a home at some point in their lifetime, and those who do will most likely need to obtain a mortgage. Having a good credit history when applying for a home loan will make it easier to get a loan, and banks will often offer a wider range of mortgage options with lower interest rates. In the case of some mortgages, saving 1-2% on interest for a mortgage can save a person tens of thousands of dollars over a lifetime! The same is true when purchasing a new car. A good credit score will make it easier when applying for an auto loan and at the same time offer more flexibility in payment plans with lower interest rates. Similar to obtaining home and auto loans, trying to establish or improve a new business also requires obtaining a loan. If applicants do not have good credit, they may not be able to get a loan or could have to pay much higher interest rates than those with good credit.

Other advantages to having good credit that people rarely think of include the ability to rent an apartment/house and landing a new job. Landlords will often do a credit check on the health of their possible tenants’ finances. Having good credit payment history shows a person’s ability to pay bills on time and can be an indicator of one’s reliability to make rental payments each month. Some employers will ask for a credit history during or even before an interview before as a possible gauge of how a person will be as an employee at their company. For example, a person with a high level of personal debt or credit delinquencies shows a lack of responsibility.

One of the simplest ways to begin establishing good credit is by getting a credit card and using it to make small purchases. It is important to remember good credit can only be established through using credit and managing it responsibly. This may mean limiting the use of a credit card to smaller or less frequent purchases each month. Paying all outstanding debt and bills on time, not just credit card bills, can also help establish good credit.

Ways to Hurt or Lower Your Credit Scores

While it is important to know how to improve your credit score, it is also beneficial to understand how actions can negatively affect your credit score and the consequences of having a poor credit score. The first thing you should know is that having too much outstanding debt will lead to higher credit risk, which will lower a credit score. Also, missing just one payment or being late will hurt a credit score. And while you may be thinking you can easily “catch” your credit score up with repayments, you must know that lenders only update your credit reports once a month. That means if you are late or missing payments, your credit score may be lower for up to a month. Another common mistake is cosigning for a loan. This can have a major impact on your credit score, and while you may simply be trying to help a friend or relative, you are loaning out your good credit. When you cosign for a loan you become the person who will have to pay the balance and all of the interest and penalty fees if the person you have cosigned for cannot afford the payments and defaults on the loan. It is important to be extremely cautious before cosigning for any loans and evaluate all of the possibilities. Hopefully these tips will have you building good credit now so that you may reap the financial benefits later in life.


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