The importance of building a credit history and credit score

A credit score represents a person’s creditworthiness. A person’s credit score is computed based on information on a credit report or credit history that typically comes from credit bureaus.

This credit score is used by lenders such as banks and credit card companies for determining the risk posed by a loan applicant. Lenders adjust the interest rate of the loans they give out according to the risk that they might not be paid back.

In the U.S., a person’s credit score is usually based on the credit report generated by the three major credit bureaus: Experian, TransUnion, and Equifax. FICO score (based on the Fair Isaac Corp. that invented it) is the most known credit score in the U.S. Aside from the FICO score, the credit bureaus provide their own scores as well. Equifax has the Equifax Credit Score while Experian has the PLUS score. New credit scores have also been developed that provide an alternative to the better known credit scores for determining a person’s creditworthiness. Consumers are allowed to get one free copy of their credit report a year in the U.S.

In Canada, Equifax and TransUnion provide credit reports and scores. The system is similar to the one found in the U.S. One major difference though is that Canadians can request a free copy of their credit report any time.

Financial Impact of a Good Credit Score

Getting a good credit score is important because the score can have a huge impact on a person’s monthly loan payments. For example, a person who takes out a mortgage with a high credit score can get a much lower interest rate of around 5.5% and pay around $850 in monthly payments. A person with a very low credit score will be assessed a much higher interest rate above 9% and they will have to pay over $1,200 in monthly payments for the same loan amount. As you can see, hundreds of dollars are at stake when a credit score is not maintained.

Establishing Good Credit History

If you want to get a high credit score and gain the benefits along with having one, you should consider building your credit history. If you have the option of getting a credit card, then this is one of the best options for building a credit history. You can get a credit card from a bank where you already have a relationship with because they should have your financial history to base your credit card application on. Store credit cards have low credit limits but they also have a higher chance of getting one because they have more lenient requirements.

If you have acquired a credit card, from either your bank or a store credit card, then the next step to take is to pay your bills diligently. You’re trying to build a credit history so you have to establish a reputation for paying your bills on time. Doing these steps will help you build a credit history. With a good credit history and report, you can obtain a higher credit score that will help lenders decide to give you a lower interest rate on loans.

This article is written by CompareHero.my, the most comprehensive financial comparison service in Malaysia.  Compare credit cards, broadband plan, and others at a competitive price.

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