Thursday, June 21, 2007

What Your Credit History Costs You

Have you ever considered how lenders determine if you are worthy for a loan, and what about all of this talk about credit scores, credit worthiness, and why should it matter? Well, to preface the explanation on why credit scores are important, let's use an example: Let's say you plan to apply for graduate school(If you are like me, you just want to make it through undergrad school). The school of your choice will have minimum requirements for you to meet. When they receive your application, letter, and other credentials, they will look to see if you meet the requirements and if you are a good fit for their school. The process is similar with lenders when they approve you for a loan, credit card, or whatever. They want to determine if you measure up to their criteria. These measurements will determine first if you get approved, but even more than that, what interest rate you pay and how much you can borrow.

Ok, why is your credit history important?

Financial institutions exist to make money, and they do this by charging interest and fees. In order to gain business, they offer different interest rates and fees to different people for a variety of reasons. These financial institutions consider your default risk(a measure to determine if you will pay your debt back), the cost of lending, and inflation(expectation of a rise in interest rates)in determining the interest rate you will pay. Only default risk is unique to you, and it is determined by your credit history. So the better your credit, the lower the interest rate you'll be offered.

As you can your credit history is vital in order for you to get the best rates on a loan. Your credit history shows what kind of default risk you have. To minimize your default risk, stay on time with your debt payments, lower any existing interest rates on current loans if possible, pay down your debt, and monitor your credit report as often as possible. If you are considering lowering your interest rates on a loan, you should consider loan consolidation, and if your credit history is less than perfect, you can get help through many credit repair specialists.

You should start now as it takes time to rebuild and build your credit history.

1 comment:

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