How Your Credit Score Impacts Your Financial Future
Many people and entities are going to be interested in seeing your credit score. This includes lenders, credit card issuers, potential employers, landlords, and others. Your credit, therefore, will largely shape your financial future. A good score enables you to achieve your goals at an early stage of your life. A bad or undesirable credit report, on the other hand, could stand in your way. For a start, you may find it difficult to buy a home or a car. In addition, the longer that you wait to build your credit, the less savings and income opportunities that you will realize throughout the years.
In short, your credit score impacts your financial future because it makes it easier to secure affordable housing, access funds during emergencies, and raise capital when you need it. Equally as important, a strong credit score may allow you to invest more money and establish residual income streams. This article will outline all the ways in which your credit defines your financial future.
Healthy Credit Leads to Financial Growth
There are two crucial benefits to having a strong credit score. First of all, you can save plenty of money in the long-term, up to thousands of dollars per year. Secondly, with more loan options (such as an auto lease or a mortgage), your income opportunities will grow. In fact, you may even secure additional ways to make money.
In order to qualify for a mortgage, consumers need to have a good credit score that’s above 600. Furthermore, many lenders would like to see an established credit history, such as consistent credit card or installment loan payments. However, meeting these requirements is certainly worth it, especially because you could save up to thousands of dollars per year. To clarify, consider the difference between a monthly mortgage payment and rent. The average home equity loan payment, including interest, is $1,000 per month. Meanwhile, the average rental rate for a two bedroom apartment is $1,400 for the same time period.
The $400 per month in savings is certainly an immediate and noticeable change. Building your credit, on the other hand, takes time. Most consumers in the US take several months, if not years, to grow their FICO or VantageScore credit by a few hundred points. Meanwhile, the savings on getting a mortgage (instead of renting) is about $5,000 per year. In short, the earlier you focus on your credit, the more money that you will save.
A strong credit score could also make it easier to earn more money. For example, a college student that focused on building their credit could qualify for an auto-loan once they graduate, if not before that. In turn, their job options increase, especially since a car makes more destinations within reach. Equally as important, a good credit score makes it easier for you to open a business. This is because lenders are willing to give you access to funding, even if it’s for a sole proprietorship or a side business that doesn’t require a large amount of startup capital. Similarly, qualifying for a mortgage and renting out a house that you just bought allows you to create a passive income stream. A real estate investment could also grow in value over the years, helping you to reach your financial goals at an early point.
In the event of an unexpected medical situation or other type of emergency, your credit score is crucial. First of all, consumers can access funding if they need an emergency loan without having to resort to predatory lenders that charge unreasonable fees and interest payments. Moreover, credit card users who make timely and consistent payments will likely have a sizable balance. In fact, most issuers will increase your available credit after you demonstrate financial responsibility.
What About Savings?
It is no secret that many Americans don’t believe that they have enough rainy day funds. Moreover, younger adults, such as college students and newly weds, may have not had the time needed to reach their savings goals. This is where a healthy credit score becomes crucial. Initially, a reliable credit history will allow you to secure a quick loan with a desirable interest rate and monthly payment. Moreover, you are more likely to get approved for the amount that you need during an emergency.
A sufficient credit card balance is also important when your savings are illiquid. That is to say, you can’t access your savings funds on the weekend if you don’t have a debit card that’s associated with the account. Consumers that prefer to invest their money in stocks could also struggle when they want to access the money quickly. This is even more likely if they have a cash account instead of a margin portfolio. In those cases, an accessible and reliable credit card is more that important. When this is complemented with a savings account or portfolio, the funds can be used to immediately pay down the credit balance or loan once you have access to them. In other words, a savings account can complement your credit score during emergencies.
Your Credit Score and Your Financial Future
Your credit score impacts your financial future in many ways. First of all, it determines how soon you can get a mortgage or auto loan. Secondly, consumers that have a healthy score will find it easier to access funding, whether its for an emergency or an investment. Above all else, with an established credit history, you can attain the tools that you need to grow your investments and income streams.
If you are thinking of building your credit, it is never too early (or too late) to start. All of the above factors, and others, will certainly shape your financial future and monetary health.