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Why your credit is vital to your interest rate and how to keep it high?

Posted by  on Feb 08, 2010
 
Whether you're looking to buy a new home or you're simply trying to plan for your financial future, you need to start worrying about your credit rating. In recent years, the United States government has made it easier than ever to obtain a copy of your credit report. Instead of having to call each of the individual credit reporting agencies, all you need to do is request a copy of your report from various websites. Each year, you will be able to receive one of these reports for free, but you can also pay for additional reports if you like.

What is a credit rating?

What you might not realize is that a credit rating and your credit score is an evaluation of your financial health. It is based on whether or not you're paying your bills on time or whether you are carrying large balances on your credit cards or other loan arrangements. If you are responsible with your money, you will find that your credit rating is high and only gets higher as you have a longer and longer credit history. What happens is that the companies that you have accounts and debts with will report to three main credit reporting agencies whether or not you've been a 'good' customer/payer.

Why is this important to your interest rate?

If one of your friends needed a lot of money from you, you might mot give it to them if they don’t have a history of paying people back. This is the same kind of thinking that lenders have. When you don't have a high credit rating, it's generally because you have troubles managing your money wisely. And this can mean that you will default on your payments or you might need to file for bankruptcy, causing your loan to be left unpaid. In order to make as much money as they can off people with poor credit histories, banks will offer larger interest rates to those with lower credit ratings. This is also done to encourage people to improve their financial health before they sign up for a major loan.

The interest rates you are offered will go down as soon as you begin to improve your credit score. In fact, the more your credit rating improves, the more your offered interest rates will improve.

How to Keep Your Credit Rating High

Needless to say, it's a good idea to improve your credit rating before you start looking into loans. Here are some easy ways for you to get started right now:

· Pay your bills on time — You need to make sure you are always paying your bills on time. Some debtors will report your lateness to credit reporting agencies, and this can show potential lenders that you're not reliable. If you find that you have troubles paying your bills on time, you might want to sign up for automatic bill pay. It's usually free and sometimes it can be set up through your bank to provide you with instant bill paying and no more late fees or credit drops.
· Don't spend more than you have — When you use a credit card, you need to have that money readily available when the bill comes due. If you're using credit cards and not paying down the balances, it can look like you are trying to live beyond your means.
· Try to create a budget — When you find that you are spending more than you have, you might want to start by creating a budget to help you reign in this reckless spending. Find out how much money you make and how much you need to spend on bills. Anything extra can go to nonessentials.
· Pay down those credit cards — Any credit card balance that is higher than 50% of the overall credit limit will not look good on your credit report. You will want to pay down your credit cards each month or at least begin to pay them down to show that you are good with paying off debts.
· Don't get rid of your credit cards — While some financial experts say that you should get rid of your credit cards when you are done paying them done, this isn't necessarily a good idea. You want to show that you have a long term credit history, so when you cancel your older credit cards, you are shortening how this looks to banks and lenders. Instead, just simply put away the credit cards that you don't want to use.

Keeping your credit rating high is easy when you realize that being responsible with your money is all that is required. And everyone could stand to learn how to manage their money a little bit better, couldn't you?

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