In he recent past, wrote about how credit scores can play a role in estate planning. The more we thought about it, the more we thought it would be a good idea to go over why credit scores are such an important factor to consider as you look at both estate and financial planning issues. Understanding how a credit score can affect your financial planning abilities is essential regardless of your current financial position. Today we are going to look at some basic credit score issues you need to know.
Credit Scores and Borrower Behavior
Credit scores are a code that tells lenders what borrowers or would-be borrowers have done with the credit they’ve had in the past. Lenders look at a variety of factors when determining whether to give borrowers loans, such as income, but credit score is always one of them. As we discussed previously, different lenders use different scores and use different factors or calculations to determine scores, but almost always use five key factors: past credit payment history, variety of credit types used, average length of credit lines used, percentage of available credit used, and number of new lines or applications.
Credit Scores and Financial Costs
Credit scores are not important of you don’t have a loan or don’t plan on obtaining a new one. But, if you have a mortgage, credit card, car loan or any other kind of consumer credit, your credit score affects you.
Take a credit card. If you have a bad credit score, the only card you are likely to get will have high interest rates and a low credit line. Not only that, but if your credit score is too low you may only qualify for a secured credit card that requires you to pay collateral before you even get it. The higher interest rates mean you’ll have to pay more for any balance you carry, which effectively means it costs you more to use the limited credit that is available to you.
On the other hand, if you have a good credit score you’ll be able to obtain much better loan terms, and better terms means paying less to use your available credit.
Credit Scores and Borrower Power
Lenders make loans so they can make a profit and they like borrowers who will repay their loans on time and without problems. As a borrower with a high credit score, you’ve proven you’re reliable and any creditor who gives you a loan will likely make money from you. This gives you power when negotiating new loans because you have the ability to shop between multiple lenders.