The Importance of a Good Credit Score

by : Paul Basco

The importance of a good credit score when applying for a new credit card is one small part of a very big financial picture for each of us. Simply put, your credit score is a measure of "risk" that all sorts of lenders weigh when they consider lending money to you.

The higher that your credit score is, the lower the risk is to the lender that you will fail to pay the balance in the terms of the agreement. Also, a higher credit rating will allow you to borrow at a much lower interest rate, which can save you thousands, or tens of thousands of dollars over time.

What Goes Into a Credit Score?

A lot more factors than you might realize go into determining your credit score. These factors are given different weights and the ratios breakdown approximately like this:

  • Payment History - 35%
  • Outstanding Debt - 30%
  • Credit History Length - 15%
  • New Credit Applications - 10%
  • Other Intangibles - 10%

As you can see, timely payment and responsible management of credit are the single biggest indicators of the score that you have earned.

Should I Apply for Several Different Cards And Choose the One With the Best Rate?
Absolutely not. Each new credit card application can negatively impact your credit rating, especially if several are submitted in a brief period of time.

As stated above, new applications make up only 10% of your credit rating. But, this number is an average, and the more applications that you submit in a given period of time, the larger that percentage can become in determining your score.

Why is the Score Important When I Apply For a New Credit Card?

The short answer is money. If your score is high, you will be regarded as a better risk for credit, and credit card companies will pass savings along to you in the form of a lower interest rate on your card. Lower interest means that if you carry a balance on your card from month to month, your finance charges will be lower, and you will be able to pay down your debt more quickly and easily.

If your score is average or low, there may be unresolved claims against your credit, or periods of time in the past where you were less careful about making sure that you paid your bills on time.

This is where a lot of people run into a Catch-22. They want to rebuild their credit score with responsible credit card use. But, the high rate of interest builds and compounds, and if they have the misfortune of an unforeseen event that causes them to miss or be late on a payment, that opens the door for credit card companies to hike their rates even further, and the downward spiral continues.

The importance of a good credit score when applying for a new credit card cannot be underestimated. In fact, establishing and managing your credit responsibly and conscientiously building your score over time is the best way to obtain low-interest financing for all sorts of things, whether it be credit cards, mortgages, automobiles, or student loans.

Your credit score can either be a lifelong asset, or a liability, but we all have these scores. If you maintain good lines of communication with your lenders and manage your credit responsibly, it will save you many thousands of dollars over the course of your life.