The U.S. economy is built upon credit, and ultimately, credit boils down to trust. When a bank gives you a credit card or a loan, they do so because they trust you to pay them back, and one of the most common ways people build that trust is by using credit cards and paying their credit card bills on time.
By demonstrating that you can pay back the money you borrow, in small or large amounts, you are establishing your credit history or credit worthiness which is reflected by your credit score. Your credit score is a grade for your financial performance, just like the ones you get at school. That grade matters to banks who determine your interest rate, to landlords who are deciding whether or not you will be responsible for your rent, and insurance companies who are setting your monthly payments.
It Pays to Have a Good Credit Score
You will want a good credit score because it will affect the cost of borrowing money. Your credit score will be used by banks and other institutions to determine how much they trust you to borrow their money. You may have to borrow money to make big ticket purchases such as a home, condo, or car. Your credit score will be used to determine if the bank is willing to lend money to you, at all, and how you will pay in interest for your loan. When you are making purchases worth thousands of dollars, a small difference in the interest rate of your loan can make a big difference in hundreds and thousands of dollars.
Consider the example of buying a house and borrowing $300,000 to make the purchase. With a poor credit score, you may not even be approved for a loan. If you are approved, your APR could be 5.2%, where you will be paying approximately $1,647 monthly, which is $293,040 of interest in total. With a good credit score, your APR could be 3.61%, where your monthly interest will be $1,366, and about $191,685 interest in total. In other words, you could be saving almost $300 a month, and nearly $100,000 with a good credit score! Consider all of the things you could have used the additional money for. If you invested your money, the amount of money you could have saved would be even greater. You may see these numbers for yourself, using the online calculator provided by myFICO.
A credit card will benefit you in the short and long run. There are plenty more benefits of using a credit card than we described above, and applying can be fast and simple.
In the next article, learn more about the different Types of Payment Cards and which ones help you build credit and which ones do not.