When you open a credit card, loan or lease account, three credit reporting agencies keep track of your credit information. Any time you request a line of credit or insurance, the lender usually pulls your credit report. The creditor will evaluate your payment history, debt-to-income ratio, number of late payments, and types of outstanding debt. If you're a higher credit risk, you will usually end up paying more for whatever you buy on credit.
Your credit score often determines the interest rate that a lender will offer. Credit cards and car loans are two examples of when a lower score will result in a higher interest rate. If you carry your credit card balance over to a new billing period, a higher interest rate means that you will pay more for your purchases. With a higher credit score, you may qualify for a lower interest rate. A lower interest rate may mean that you will be able to carry a higher balance and end up paying less overall.
Insurance carriers might deny or restrict coverage to applicants who do not pass minimum credit standards. If you are an applicant with a borderline credit score and history, you may pay more for your annual premium. In some cases, a carrier will require you to authorize automatic monthly payments from a checking account if your credit score is inadequate. An insurance carrier considers you to be less of a long-term risk when you have a higher credit score. With a higher score, carriers might offer you lower premiums for car and home insurance.
You may need to put a larger down payment towards substantial purchases, such as a vehicle, when you want to take out a loan. A bank may be willing to lend those with lower credit scores a loan, as it is only for a certain percentage of the vehicle's purchase price. If you have a short credit history or high amounts of revolving debt you might need to take out a loan for a longer term. While the monthly payments for a five-year car loan versus a three-year loan will be less, the total cost of the purchase plus interest will be higher.
Some credit card issuers may insist that you establish a secured credit line if you have little or poor credit history. A secured credit card means that you must pay an upfront amount in cash. The credit card company holds this amount and allows you to charge purchases against it. For example, a secured credit card with a line of $500 allows you to charge purchases and carry an outstanding balance up to $500. You do not get your $500 back until you close the account or the bank allows you to convert the account to an unsecured credit line.
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