Why Credit Matters

Our certified counselors talk with people about why credit matters, and why it’s a key building block to overall financial health and wellness.

Understanding your credit is easier than you may think. Building it properly has its benefits. It can help with everything from buying a car, house, to getting a job. Yes, even getting a job. That three-digit number can be an important building block in establishing a solid financial foundation.

Sometimes, the unexpected can happen; like a pandemic, a temporary loss of income, or an illness. Improving your credit may take time and patience, but it is worth it. If you have run into a bump in the road or experienced an unexpected hardship in your finances, there are programs to help.

Why is a good credit rating so important?

Juggling your credit is possible with planning and knowledge to get a better handle on your financial future. It is helpful to understand how it can impact you, your family, and your goals for the future.

Credit scores are increasingly important as the economy continues to recover, and more people apply for loans, rent, and buy homes. Banks and other lending institutions use your credit scores to decide who is a good risk based on their previous financial history.

Having a good credit score can save you money

What does this all mean? A good credit score is part of a path to provide opportunities you may not otherwise be able to access. Lower interest rates are offered to people with better credit scores – that means more money staying in your pocket. It’s also easier to get a loan or line of credit. Many companies require at least a fair credit rating before they will even consider doing business with you.

How is your credit score determined?

Your FICO Score (Fair Isaac Corporation) is a three-digit number based on the information in your credit reports. It helps lenders determine how likely you are to repay a loan. This, in turn, affects how much you can borrow, how many months you must repay, and how much it will cost (the interest rate).

When you apply for credit, lenders need a fast and consistent way to decide whether to loan you money. In most cases, they’ll look at your FICO Scores which track history with credit card debt.

There are several factors that help determine your credit score. Understanding them can get and keep you on a great path.

• Payment History (35%) – Are you paying your bills on time? Keeping up with your payments and having a history of doing so, is a big factor in your credit score. If you’ve fallen behind, or need to get back on track; you can set up automatic payments, set reminders, maintain a monthly budget or savings plan.
• Amounts You Owe and How You Use Available Credit (30%) – Know your credit limit and keep your balances low (30% of available credit or less).
  • If your balances are high, create a proactive plan to pay them down.
  • As you are working to pay down balances, stop using the card altogether. Also, instead of paying the minimum, increase your monthly payment.
• Length of Credit History (15%) – How long you have had a line of credit open can help you.
  • Review your credit report to see how long it has been open.
  • Keep accounts active. If possible, keep older accounts open. The longer a credit line is open, the more it helps you in the long run. Subscription payments can be a great way to keep an account active, without interest charges.
• Types of Credit You Use and Your/Credit Mix (10%) – It’s important to have a combination of revolving accounts and installment loans. This shows your ability to responsibly handle different types of loans like auto loans, personal loans, or student loans.
• New credit / Having too many lines of credit (10%) – Opening an account is certainly ok. Opening five accounts at once…maybe not so much. When you apply for credit, remember:
  • Applications for new credit stay on your account for two years.
  • When you do apply, it can cause a slight dip in your credit score.
  • Remember it is important to handle any new accounts responsibly to avoid more significant impact to credit.
  • If you are taking on too much credit, it could signal you are having financial issues.

Why Credit Matters – Next Steps

Establishing good credit shows you are responsible, and you’re ready to help build a positive future for yourself.

If you’re not where you want to be in terms of your finances, start today by understanding where you are, your credit, and put a plan in place. Free help is available through GreenPath. You’ll benefit from financial assessments, housing counseling, credit report reviews, and debt management.