Credit scores indicate your financial health, creditworthiness, and overall financial health. The importance of building good credit early on cannot be overstated since it is a crucial part of your financial identity. Having a bad credit score can increase the cost of your largest financial purchases while having a good score gives you a competitive edge when applying for loans.
Many of us define financial freedom as the ability to afford the lifestyle we desire through savings, investments, and cash on hand.
Different people have different ideas about what “financial freedom” entails. The freedom to buy whatever you want and when you want is one of the definitions of financial freedom. People might feel more relaxed about their finances if they don’t have to worry about their bills or sudden expenses. Some people define it as becoming debt-free, while others may define it as becoming wealthy enough to retire. In spite of the fact that all of these interpretations are somewhat true, they all provide only half-baked solutions. We’ll examine the ‘cash on hand’ portion of that statement and discuss how credit (via loans and credit cards) can be a more efficient way to build financial freedom.
A borrower’s creditworthiness is determined by his or her ability to repay a loan or credit. There are several ways in which having good creditworthiness can help you become financially independent:
- Access to better credit terms: Lenders are more likely to offer you better credit terms if you have good creditworthiness, such as lower interest rates, longer repayment periods, and higher credit limits. In addition to saving you money in interest charges, this will allow you to manage your debt more efficiently.
- Ability to secure loans and credit: If you have good credit, you can obtain loans and credit more easily, whether you need a mortgage, a car loan, or a credit card. Your financial goals will be more likely to be achieved if you take this approach, such as buying a home or starting a business.
- Improved job prospects: A number of employers check credit scores as part of the hiring process. Having a good credit score may signal to potential employers that you’re reliable and responsible, which could boost your job prospects and potentially lead to higher salaries. Personal credit checks are required for some jobs, such as those in the finance sector or those requiring security clearance. The purpose is to make sure you’re capable of handling finances or that financial difficulties will not make you vulnerable to bribery. There are some jobs that you might not be able to apply for if you have a poor credit score.
- A better sense of financial security: Maintaining good creditworthiness demonstrates your ability to manage credit responsibly and reduces your chances of getting into financial trouble. In addition to improving your ability to handle unexpected expenses, this can also make you more prepared to handle emergencies.
- Having good credit will lower your interest rates: Lower interest rates are one of the main benefits of having good credit. The interest rate you will pay when applying for a loan, such as a mortgage or credit card, is usually determined by your credit score. Learn how to improve your credit score in a faster way here. Credit scores with higher scores typically attract the lowest rates; less credit-worthy applicants often find their interest rates higher. It is the lender’s responsibility to determine and set the interest rate for each individual. Based on the information provided, the rates are believed to be accurate.
- The average interest rate on a personal loan depends on your credit score: Increasing your chances of qualifying for a loan or credit. If you have ever been denied a credit card or loan, you understand how painful it can be. Denial of financing for an important purchase, such as a mortgage or a car, can be a hardship. Getting denied other loans, such as private student loans that can help many people afford college, can be devastating. In addition to better credit scores, applicants are more likely to be approved. Obviously, lenders consider your credit score in addition to other factors, but it is important.
- Larger Credit Card and Loan Limits: You’ll be able to take out a mortgage in some high-cost areas if you have a good credit score, such as a jumbo loan. Additionally, you may be eligible for higher credit card limits. An Experian study found that the average Baby Boomer had a credit score of 731 and a credit limit of nearly 32,820,60 INR. In contrast, young Millennials had a lower credit score of 668 and a smaller credit limit of around 16,410,30 INR. As credit scores are influenced by the length of your credit history, Baby Boomers have had more time to build good credit than earlier generations.
- Rewards from credit cards that are better: The better your credit score, the more credit cards you’ll be able to apply for, including cards with higher limits. It is important to have excellent credit in order to be approved for most rewards cards. In addition, to travel rewards cards, you can also earn cash-back rewards cards that earn a percentage back on your spending.
- Easier Approval for Rental Properties: No matter whether you plan to buy a house in the near future, it is still important to have a good credit score. In most cases, landlords consider your credit score when deciding whether to rent to you, which is something most people are unaware of. The landlord is more likely to approve you as a tenant if you have a good credit score since an on-time payment history is more appealing to them than someone with multiple delinquencies. If you do not meet these requirements, you may need to pay a larger deposit, agree to a short-term lease, or even have your application denied altogether.
- Lower Insurance Rates: Insurance costs can also be reduced if you have good credit. Insurance companies use your credit score to determine whether to accept you as a customer and how much to charge you, despite some officials’ concerns. Those with fair credit (a FICO score between 580 and 669) pay 39% more for auto insurance, according to a study by insuranceQuotes. The situation was even worse for people with poor credit (A FICO score under 580), who paid 103% more.
- Avoid Security Deposits on Utilities: When it comes to getting your utilities turned on, a good credit score is important, too. A good credit score will likely lead to your utilities being turned on with a minimum amount of hassle. You may also need a deposit from you if your credit is poor, or even someone to legally agree to pay your bill in case of non-payment, similar to finding a co-signer for a loan.
- Negotiating Power on Loan Terms: Better credit scores can lower interest rates, as well as be used as a bargaining chip during mortgage negotiations. Prequalification and comparison of rates with a few lenders will help you achieve this. If your rate estimate is accurate, you can take it around to different lenders to see if they can give you better terms, such as lowering the interest rate even further or waiving loan fees.
Bottom Line
The importance of maintaining and building a strong credit profile cannot be overstated, since the credit score is an important component of most lending decisions. In order to prepare for any future loan or rental applications, make sure to improve your credit score if you have a low score. Having good creditworthiness is important for attaining financial independence, as it gives you access to better credit terms, allows you to secure loans and credit, improves your job prospects, and makes life more comfortable.
