Credit 201: What Can Good Credit Do for You?
Credit cards are generally the first step for establishing a good credit rating, which is key for a healthy budget. While millennials and Gen Z’ers may bemoan the credit rating system—and with good reason—credit scores are still a fundamental requirement for accessing the acquisition of large assets such as cars and homes. When used correctly, credit cards can pave the way for greater financial freedom. The emphasis here is “when used correctly.”
As you build your credit, you’ll benefit from lower interest rates. As it stands now, “starter” credit cards often have a higher price tag in terms of the annual percentage rate (APR), which hover in the 20% range.
Credit Card Fees & Interest Rates Become More Negotiable
Depending on your credit limit and how much you use the card, fees and interest rates can cost you hundreds of dollars more. But over time, these costs are reduced through timely payments and conscientious monitoring of hard inquiries for additional cards or other lending providers. When you apply for a loan or other form of credit, this is known as a hard inquiry, and it can bring down your credit score.
Being judicious about loan applications and repayment in the now translates into additional future benefits. Approval for higher lending limits is one of the short-term benefits of keeping a close eye on your credit card utilization patterns. Keep in mind that credit utilization is one of the metrics that affect your FICO and VantageScore. If you are granted higher credit card limits, this is not a green light to spend more. It can, however, lead to further advantages down the road.
Taking Advantage of Credit Card Perks & Rewards
Credit card perks and rewards are another benefit to wise credit card usage. Most credit card issuers will increase those perks as your good payment history continues. Want cash back on your grocery purchases? Are you a frequent traveler? Returning to school and need to pinch pennies for a while? A great credit score will help keep you afloat during those lean financial times—that is, as long as you keep up with your payments.
How Your Credit Score Affects Your Home-Buying Power
One particular advantage is obtaining a home loan. The higher your credit score, the more likely you’ll be able to secure a mortgage with a lower interest rate and a decreased down payment. Right now, the down payment required by a traditional financial institution is 20%.
Given that the median home price in the U.S. is $253,500, a 20% down payment means you’d have to scrounge up $52,700. Though there are alternative methods for obtaining a mortgage, such as programs available through HUD, the USDA, and VA, there are still limitations for taking advantage of these federal programs.
Why spend all that time and energy diligently paying your credit cards on time and keeping an eye on your credit score only to be limited to a certain type of home?
Credit Score & Your Power When Purchasing Insurance
Insurance is required for just about every aspect of our lives. Car insurance, in particular, is one of those “wish I didn’t have to pay this” responsibilities. Homeowners insurance can be added to that sentiment. In most states, the rates you are quoted for homeowner’s insurance, car insurance, or both, are based on your credit score. Therefore, the better your credit score, the more likely your insurance costs for home and auto are to decrease.
Certainly, your worth as a human being is not equivalent to your credit score, and a bad credit score isn’t the end of your ability to make financial moves. Your financial assets are merely a measure of how you operate within a single context.
Fundamentally your credit report, in combination with your credit score, answers the two-part question, “Do you pay on time, and have you demonstrated high-risk credit utilization?” If the answer to the first part of that question is yes, while the answer to the second part is no, then the you’ll reap the benefits of trustworthiness in terms of being a viable candidate for additional lending.
It all begins with using those new credit cards strategically.