Money Girl answers reader questions to clear up common misunderstandings about applying for credit and changing your credit limits.
Just about every aspect of personal finance can be confusing. But if I had to pick one that seems to leave people scratching their heads the most, it would be credit.
There are some common misunderstandings about what happens to credit scores when you apply for new credit or have an existing credit limit changed. In this episode I’ll clear up any confusion by answering reader questions and tell you what you need to know to maintain excellent credit for life..
What Is a Credit Score?
· Your credit report is a history of your credit accounts and payment activity. It also includes your basic personal information and certain types of public data, like whether you’ve declared bankruptcy or are involved in a lawsuit. You’re legally entitled to a copy of your credit report from each of the 3 nationwide credit agencies once a year at annualcreditreport.com. Although it’s full of important information that you should review for accuracy at least every 12 months, don’t expect to see your credit score.
· Your credit score is a rating that quantifies the potential risk you pose to a lender or merchant. The higher your score, the less risky you appear. There are hundreds of different credit scoring models in use today, each with its own scale and mathematical formula. A variety of companies, including the credit agencies, sell credit scores to consumers, lenders, and merchants.
Why Credit Scores Are Important
Your credit score is important because having poor credit is expensive. But don’t fall into the trap of thinking that credit only matters if you’re applying for a mortgage or a car loan. Many people who don’t like the idea of having debt seem to discredit credit and say that it’s insignificant.
It’s true that you’ll pay much higher interest rates for loans and credit cards if you don’t have excellent credit. For instance, poor credit could cost you a whopping $70,000 in additional interest on a $200,000, 30-year mortgage!
However, your credit also affects your finances in many less obvious ways that are unrelated to debt...