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Why Good Credit Scores Matter

High credit scores matter when it comes to obtaining good interest rates on loans and lines of credit.

Building a solid credit profile is an essential task for anyone who expects to borrow for major purchases or to obtain lucrative credit cards with great rewards. High credit scores matter when you're chasing lower rates on loans too.

People who opt to shun credit and debt from their lives may never have to worry about establishing great credit, but the majority of consumers are likely to borrow in order to reach major life milestones, such a paying for a wedding or buying a new home.

Individuals have their own credit reports that record their credit accounts, delinquencies, bankruptcies and other financial data within the last 10 years. Lenders will pull consumer credit reports from the three major credit bureaus: Equifax, Experian and TransUnion.

Additionally, credit scores have become the standard metric in gauging the creditworthiness of consumers. While there are many types of credit scores out there, the FICO credit score (from the Fair Isaac Corporation) is the most popular credit score.

The formula to calculate your FICO score is a secret, but the company shares the criteria that affects every person’s credit score.

These are five parts to a FICO score:

  • Payment history
  • Amounts owed
  • Length of credit history
  • New credit
  • Types of credit used

A good credit score will reflect on-time payments, low debt balances, longstanding credit accounts, no new credit, and different types of credit accounts (e.g., credit card, car loan, mortgage, etc).

A bad credit score is usually the result of late payments and defaulting on loans and other financial responsibilities.

Whether you’re trying to build or rebuild your credit profile, it is going to take some time before your credit score can recover to a level that is acceptable to lenders. It can take months or even years to improve your credit.

Before you make the moves to boost your credit score, you should first get a grasp of where you stand. Check out the next step to see how you can monitor your credit on the cheap.

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