Last week we looked at how credit scores and estate planning can sometimes be connected. The more we thought about the issue, the more we thought that we should cover the credit score topic in a little more depth. Any time you deal with financial and estate planning issues, knowing some basic facts about credit scores can be helpful. So, today we wanted to cover some basic questions about credit scores.
What affects a credit score?
As we discussed in our previous blog post, credit scores are numbers that tell lenders how reliable a borrower has been when using credit in the past. Credit scoring companies make their own determinations about what goes into a score, but they generally use the same basic factors. These are: past credit payment history, current amount of credit used, current types of credit accounts, average length of current accounts, and the number of new credit lines or applications.
What does it have to do with financial planning?
Credit scores are also important because they affect the terms of credit you’re able to get. Let’s say, for example, that you bought your first house when you were younger. Because you likely did not have a long history of credit use, your credit score when you obtained your mortgage was probably not as high as it is now. With a significantly higher credit score, you’re much more likely to be able to obtain better interest rates, and might be able to refinance your mortgage. A refinanced mortgage can often be a significant financial advantage.
What else does a good credit score do?
A good credit score also provides a range of other financial planning benefits. A good credit score will allow you to access the best credit card offers, both in terms of interest rates, but also when it comes to rewards and bonuses. Beyond credit cards, negotiating the terms of any loan or credit agreement with a high credit score gives you more power to negotiate favorable loan terms with new lenders.
Why do I need a good credit score?
While having a good credit score is generally a positive thing, not having a good score is not necessarily bad. A good credit score is simply a tool that allows you to obtain new forms of credit, or to obtain more beneficial terms on that credit, such as lower interests rate. A bad score, on the other hand, makes it harder to obtain credit, and limits you to types of credit with less beneficial terms.
But, if you’re not interested in obtaining new lines of credit, or don’t think you’ll need to apply for credit any time soon, good or bad credit scores won’t necessarily affect you.