by Christy Bieber | Jan. 24, 2021
Your good credit could open the door to improving your overall financial situation.
There are lots of reasons why having a good credit score is important. However, one of the biggest benefits of having excellent credit is that your score can open the door to opportunities that are likely to improve your financial situation over the long term.
Here's how this can work, and why it can be such a big benefit to you.
Here's an example that perfectly illustrates why having good credit matters so much. Recently, there has been a substantial increase in mortgage refinance loans as mortgage rates hit record lows, according to a new survey from the Federal Reserve Bank of New York. However, the major increase in refinance loans was driven by borrowers with high credit scores, with most of the borrowers who refinanced having scores above 760.
Refinancing a mortgage can result in lower monthly payments, freeing up more money for other purposes -- such as saving for retirement or building up an emergency fund. It can also mean you'll pay less interest over time. But since many lenders tightened credit standards during the pandemic, homeowners with good credit were in the best position to take advantage of these benefits by refinancing at unprecedented low rates.
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This is just one example of how having a high credit score helps you make financial choices that set you up for a more secure future. A good score could also make it possible to buy a house in the first place, letting you build equity and benefit from rising property values.
Good credit could also help you get a business loan to start your own company, qualify for credit cards with generous rewards, or borrow at an affordable rate to buy a car so you can get to work on time. Or it could allow you to refinance high-interest debt (such as credit card debt) into a personal loan with more affordable rates so you can pay off your debt more quickly and spend less money doing it.
Unfortunately, if you don't have a favorable credit score, you might not have access to many of these opportunities. And when or if you absolutely need to borrow, you could be forced to choose a high-interest loan that is harder to repay on time.
Since good credit is so important, earning a high score should be one of your top financial priorities if you're hoping to achieve financial stability and build wealth.
The best way to do that is to be responsible with borrowing at all times. If you already have credit cards or other debt, commit to making every payment on time and paying down your balances as quickly as possible to improve your credit utilization ratio. If you don't have any credit yet, you'll need some to build your score, so consider applying for a credit card (even if you need to start with a secured credit card). Use it to make small purchases and pay it off in full every month.
It could take time to earn the type of credit score that lets you take advantage of great financial opportunities. But the sooner you start working on improving your score, the sooner you'll be able to ensure you don't miss out.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
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