The Importance of Your Credit Score

Unfortunately, debt is a way of life for most Americans. Overall, U.S. household debt has increased by 11% in the past decade, and today the average household with credit card debt has balances totaling $16,425. The average household with any kind of debt owes $135,924, including mortgages.

If those numbers are frightening to you, or if you’re in a general anti-credit frame of mind, you might take a moment to rethink the situation.

Your credit score is the number by which a lot of important transactions are decided. There are three minimum requirements to generate a FICO score. First, you need to have a credit file that reflects you are not deceased. Second, you must have at least one account open for six months or more. And third, you need to have at least one account that's been reported to the credit bureaus. 

If you have zero or limited credit, you can satisfy the "at least one account" requirement with something as simple as a secured credit card or maybe a credit-building loan from your bank or credit union.

Choosing to avoid credit puts you in a fragile position when it comes to some very common and very important transactions.

For example:

Renting an apartment or home

When you want to rent, the landlord or manager usually checks your credit report. From this, they can tell if you're likely to be a tenant who pays on time, and they will heavily rely on this information to either approve or disapprove your application.

Buying a home

Unless you have cash in hand to buy your home, if you don't have a FICO score, it could be very difficult to find a mortgage lender. And since it takes time to earn an excellent credit score, the longer you wait to start working on it, the more interest you're going to have to pay on your mortgage.

Refinancing student loans

The average monthly student loan payment for those between the ages of 20 and 30, per the Federal Reserve Bank of Cleveland, was $351 in 2015. [3] That’s a dent in your monthly budget, no matter who you are. Once you develop a good credit score, you can consolidate your student loans and maybe get a better interest rate than what you currently have, reducing monthly payments.

The list of transactions that require a good credit score goes on and on. From purchasing a new car to getting a bank loan, and many more — anything that requires the potential lender to want to know that you will be a safe bet when it comes to repayment.

 

IMPORTANT DISCLOSURES

 

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law.

Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable– we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. Member FINRA & SIPC.