Rule 1: Maintain a good credit rating
Your credit score can affect many aspects of your life. Whether you need a loan to buy a home or if you apply for a credit card, your score is used to judge your reliability and risk. Your credit score helps determine the terms of your loans and if you'll even be approved.
The pros to having a good credit score
A good credit score means lower interest rates. It shows you have a responsible credit history and that you are a low-risk borrower who is less likely to default on your loans. So when you apply for a mortgage or auto loan, a lower interest rate could save you hundreds, if not thousands, of dollars in interest costs.
A good credit score also allows you to be more selective when choosing your lender. The better your score, the more leverage you may have in getting good terms on your loans. Shop around: Having lenders compete against each other can mean you get a more competitive interest rate and ensures that you know that you explored a wide range of lenders before you committed to one.
The cons to having a poor credit score
Lenders use your credit score to judge how likely you are to repay a loan. A poor credit score may mean your loan application is rejected. But that's just the start.
Your credit score is not only checked by lenders — it can be used when you make other financial arrangements, such as renting an apartment or signing up for utilities. In cities where rental companies can be selective about tenants, a bad credit history can make you an unappealing candidate. Bad credit can get you denied for basic services, such as electricity or a cell phone, if your credit report shows that you tend to pay late.
A poor credit score can even cost you a job! Prospective employers may check your credit rating to judge your degree of responsibility.
Many lenders charge different interest rates, depending on the applicant's credit score, so even though you might get approved with a so-so credit score, you may pay a higher interest rate than someone with a better credit score.
Get more valuable information on ways to maintain your credit score
Rule 2: Borrow only what you can afford
The concept is simple. Don't borrow more than you need. But how can you know how much is "too much"? Your debt-to-income ratio is the comparison between what you owe and what you earn (every month), and it's a key number lenders use to determine your capacity to borrow additional funds. It's usually a principal component in determining whether a loan application is approved.
Learn more about debt-to-income ratio
Being responsible with your credit and your finances -- saves money. Stay tuned for more credit management rules in our next newsletter.
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