What’s So Good about a Good Credit History?

/ BY / Credit Score

Have you ever wondered why having a good credit history is so important?

Your credit history is a record of how well you pay back the money you owe. Your creditors-the companies or financial institutions that lend you money to buy your home, finance your car or pay for college-let the credit bureaus know whether or not you make payments on time, if you've missed a payment or if you pay less than the minimum balance that you owe on an account. The credit bureaus use the information in your credit history to help determine your credit score -- a measure of your creditworthiness, or how likely you are to repay a loan.

Your credit history and credit score make a significant difference in several areas of your life. Lenders and credit card companies, for example, use your credit history to decide what interest rate you'll pay on the money that you borrow (or the credit that they extend to you). The better your credit history, the lower the interest rates you'll pay.

  • Suppose you take out a fixed, 30-year mortgage for $100,000. If you have a good credit score, you may be able to get an interest rate of about 3.5% these days. Over the 30-year life of the loan, you'd pay a little over $61,650 in interest.
  • Now suppose your credit score isn't so good. You might have to pay an interest rate closer to 4.5% over that same 30-year period. You'd end up paying more than $82,000 in interest as you paid off the loan.

Think of all the things that you could do with the extra $20,000 you'd keep because of your good credit history. You could save for college or for retirement, buy a car, or take that special vacation.

Save more, earn more

Did you know that many auto insurers use credit scores to help figure out the insurance premium that you pay? Insurers don't reveal exactly how much weight is given to these scores, but they argue that a good credit score demonstrates that you're a responsible person. In their view, responsible people are less likely to be involved in risky behavior that will lead to vehicle accidents.

A good credit score may also help you land a better-paying, more attractive job. Although the practice is controversial, many companies look at a potential employee's credit history and credit score when they're making a hiring decision. If you have a good credit history, it may be just the edge you need to beat out the other candidates. (Better jobs also mean better earnings over time.)

Want to buy a new cell phone and sign up for a new plan? The wireless carrier is going to check your credit history and your credit score. If they're not good enough, you may not be able to get the phone that you want.

Improving your credit history and credit score

If you're convinced that having a good credit history is in your best interest-but not so sure that yours is where you'd like it to be -- here are some suggestions for improving it.

  • Ask for your free credit report from each of the three major credit reporting agencies. You're entitled to one a year from each agency. (A note of caution-use the government site above. Other sites may charge a fee.) Look for errors on your report, and follow the procedure outlined at the site to correct them.
  • Pay your bills (mortgage, loans, credit cards, utility bills, etc.) on time and make sure you pay the minimum balance due
  • Use credit-but use it wisely and don't get in debt over your head. Keep your credit balance to limit ratio below 30 percent.
  • Don't open too many credit card accounts, especially within a short time period.

You can also check out the Federal Trade Commission's website for more hints on improving your credit score.

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Please note your financial situation is unique and our tips & advice presented here may not be appropriate for your situation. CreditCardXpo.com recommends that you seek different advice & opinions from your own accountant or financial adviser who understands your individual circumstances before making any important decisions or implementing any financial strategy.