The game of credit

It’s a simple financial truth: Credit scores are important.

How important? Individuals with strong credit will save thousands of dollars more over a lifetime than individuals with poor or damaged credit scores. Thousands of dollars is likely a conservative estimate—the actual savings could be much more.

Another simple financial truth: Strong credit can get you better financing rates.

For example, let’s say you are in the market to buy a new car and want to finance $20,000 over 5 years. If you have strong credit, you may qualify for a 2.99% interest rate on a car loan. If you have average credit, you may receive a 5.9% rate. What’s the difference? Having the 2.99% rate will save you about $1,500 over the life of the loan.

Credit is like a game. If you don’t know the rules, you can’t win. At the risk of oversimplifying, here are two of the most important things that will affect your credit score. (Side note: Be sure to check out everything that factors in through that link.)

  • Payment History. Think of it like a report card for your credit. If you have credit obligations and are paying them on time your score will be positively impacted. By missing payments or becoming delinquent, your score will decrease. Think about it this way: If you have a cumulative 3.0 GPA and just received a D+ in Chemistry, it will take many semesters of A’s and B’s to return your GPA back to a 3.0. One bad mark stays with you for awhile.
  • Amounts Owed. How much money you owe on your credit obligations. It’s OK to owe money—that’s how you establish credit in the first place. But you don’t want to owe more than you can handle. Furthermore, it’s important not to run up your balances on your revolving lines of credit, (i.e. credit cards). Just because you have room on your credit line, doesn’t mean you should spend the money.

The above two items account for 65% of your total credit score. There are three other areas that directly impact your score: length of credit history, new credit, and types of credit used.

I encourage each of you to take personal responsibility to learn the rules of the credit game. And then make the game work for you by securing a strong credit score!

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