The Importance of Your Credit Score for Major Purchases in 2024
Credit is a big part of your financial life, so when thinking about building your credit, should you use it for big purchases? Let’s dive into why credit is important.
FICO scores range from 300 to 850, and a score between 670 and 739 is considered “good.” Good credit can help you get lower interest rates on expensive items like a refrigerator, saving you money over time.
Lenders look at your credit score to decide what kind of loan you can get. A low score might mean you can’t get a low-interest loan. Insurance companies also use your credit score to set your auto or homeowners insurance rates, so a good score can mean lower premiums.
If you rent, landlords check your credit score, and a high score might lower your security deposit. Employers also check credit reports when hiring, and a bad score can be a red flag.
Now, should you use a credit card for big purchases this year? Let’s look at the pros and cons.
**Pros of Using Your Credit Card for Big Purchases**
**Borrow for Needs**: Using your credit card or borrowing from your bank lets you buy necessities even if you don’t have cash on hand. For example, if your cash is earning interest, it might make sense to leave it there and use credit instead.
**Building Credit History**: Using credit responsibly, like paying off purchases on time, can improve your credit score. This is crucial for bigger purchases like a house or car. A higher credit score can get you the lowest possible interest rates, saving you money and helping you pay off loans faster.
**Protection and Rewards**: Credit cards offer protections like fraud liability and warranties. Many also provide travel or cash-back rewards.
**Managing Cash Flow**: Using credit allows you to spread out payments on larger purchases, which can help you keep liquidity for other investments.
**Emergency Readiness**: Having access to credit gives you a financial safety net for unexpected situations like illness or home repairs.
**Consider the Cons**
**Cycle of Debt**: A low credit score means you won’t qualify for low-interest loans, leading to higher interest rates and potentially a cycle of debt. If your score is low, work on improving it before making large purchases on credit.
**Debt Accumulation**: It’s easy to overspend with a credit card because you can delay thinking about repayment. But once the excitement of a new purchase wears off, you might face high debt levels. To maintain a good credit score, plan to pay off your balance in full with each statement.
**Financial Stress**: Managing large amounts of debt can be stressful and limit your financial flexibility. Planning with your family or a financial advisor can give you more control over your finances.
**Hidden Fees**: Some credit agreements have hidden fees or penalties that increase borrowing costs. Compare credit cards by asking family or friends about their experiences.
Everyone’s needs are different, so find what works best for you. Just make sure to do your research before signing up for a new credit card.