You’ve likely heard that having a good credit score is important.
But why does this three-digit number matter so much? It can impact your finances in many ways. Whether you want to make a major purchase with financing or clear a potential employer’s screening, a high credit score can come in handy.
Let’s take a closer look at the reasons why a good credit score is so essential.
On the surface, your credit score may only seem to impact your financing options.
But a credit score can have far-reaching consequences in your life beyond access to loans. For example, it could impact what landlords will allow you to live in their space or how much you’ll pay to set up your utility account.
Ultimately, a good credit score is just one more tool to use when building your ideal life. Here’s a look at why having a good credit score should be a priority.
A good credit score opens the door to more attractive financing opportunities. Most of us tap into financing for large purchases, such as a home or car.
With a better credit score, you can unlock better interest rates. So, that can make a big difference in your budget, especially for big-ticket purchases.
For example, let’s say that you are taking out a $200,000 30-year mortgage with a fixed interest rate of 6.0%. Your monthly payment would be $1,199.10. Plus, you’d pay $231,676.38 in interest over the life of the loan.
But if you had a better credit score, you might be able to unlock a 5.5% interest rate. In that case, your monthly payment would be $1,135.58. And you’d pay $208.808.08 in interest over the life of the loan. That’s over $20,000 in savings over the loan term. Plus, you’d save $60 each month.
And access to better financing terms doesn’t stop with your mortgage. You can expect better interest rates across all kinds of financing. With that, you can save on interest costs on your auto loan, credit cards, and more.
If you are renting, a good credit score will come in handy. Most landlords will run a credit check before approving your lease.
Why would a landlord expect a good credit score from their tenants?
When you sign a lease, you agree to make regular monthly payments in exchange for a place to live. Like a lender, landlords want to make sure that you are considered creditworthy.
If you have a bad credit score, it can be more of a challenge to find a nice apartment to call home. Even if a landlord is willing to let you move in, you might have to make a much larger security deposit. A deposit is something you should get back if you stick to the terms of the lease, but many of us would struggle to scrape up the funds for a major security deposit in the middle of a move across town.
Although not all employers check your credit report, many do.
The reasoning behind a credit check pre-employment is to make sure that you’ve proven yourself to be financially responsible. This is especially true if a potential employer plans to give you access to company funds.
Many employers want to make sure that you won’t be tempted to abuse your company position.
Of course, it is absolutely possible to get a job without a perfect credit history. But late payments or an extensive debt burden could be an issue with some employers.
Taking out a loan isn’t the only time that a good credit score can help your budget.
It might be surprising. But most utility companies and cell phone providers will check your credit before establishing your service.
If you don’t have a good credit score, most will require a bigger deposit before starting your service. That’s right! These essentially unavoidable bills can come with an expensive upfront cost to get started.
If you do have good credit, the company may start service without any mention of a deposit. And that’s a big help to any budget! Although you’ll likely get your deposit back if you make on-time payments, it’s easier if you don’t have to make a deposit in the first place. After all, moving is already expensive. You don’t want to get stuck with more expenses crunching your cash flow.
Even with a bad credit score, you can likely still get access to a credit card of some kind. But it will likely be a secured card that requires a security deposit or one with extremely high fees and interest rates.
Although you can use a credit card available for those with bad credit as a tool to build credit, there aren’t usually any rewards attached to your spending.
Wouldn’t it be nice to get rewarded for spending you were already planning to do? A premium rewards credit card does exactly that! You can earn rewards based on your credit card spending.
A high credit score will grant you access to the best rewards credit cards on the market.
The right rewards credit card for you will depend on your preferences. Some rewards credit cards offer cashback based on your spending. Other rewards credit cards will reward you for your spending with points that you can redeem on travel. And there are plenty of other rewards strategies out there. Whether you want cold hard cash or a specialized reward, a high credit score can open the door to a credit card that offers the perks you are looking for.
Personally, I use my high credit score to tap into premium rewards credit cards centered on travel. I’ve been able to stretch my travel budget a bit further, thanks to a higher credit score and a worthwhile credit card filled with perks.
But you can apply for rewards credit cards that align with your budget goals. For example, you might take advantage of a cash back rewards credit card which would give you the freedom to spend that reward however you wish.
A final reason to pursue a good credit score is the potential insurance savings on the table. Of course, you’ll be able to obtain insurance with or without a good credit score. The difference is that many insurance companies often offer lower rates for policyholders with good credit.
Why would an insurance company care about your credit score?
An insurer wants to make sure that you can afford to make the premium payments. If you have a history of missing monthly payments, that is a red flag for the insurance company. The usual way for a company to compensate for the red flag is to offer you a policy with a higher premium.
With that, someone with bad credit might pay more than someone with good credit for the same insurance policy. Most insurance policies are unavoidable in many areas of your life. For example, you might be required to pay for homeowners insurance or auto insurance through your lender. So the savings available to good credit policyholders can really add up quickly.
Tapping into insurance savings is another way that good credit history can improve your finances.
It’s clear that a good credit score can lead to great things for your personal finances.
We’ve worked through the specific reasons why a great credit score can help you. But essentially, the benefits boil down to easier access to affordable finances and opportunities to save on many unavoidable bills.
Before we dive into the strategies of building good credit, it’s important to point out that building good credit takes time. But with the right moves, you’ll be on your way to a better credit score.
How can you build a good credit score? Let’s explore the top ways to build your credit score.
The first step of getting a good credit score is to find out where you currently stand.
Luckily, you can check your credit score for free. Most can check their credit score for free with their credit card issuer. But if you don’t have a credit card, you can check your score through Experian.
With your score in hand, see where it falls on the scale:
If you have a score of 670 or above, that’s generally considered a good credit score. Although there might be some room for improvement, you are in a great place.
But if you have a credit score of 669 or below, you’ve got some work to do to improve your credit score. The good news is that it is absolutely possible to improve your credit score.
Once you’ve checked your score, it’s time to check your credit report.
While your credit score is a three-digit number that indicates your creditworthiness, your credit report is a detailed document about your credit history. Within your credit report, credit bureaus include identifying information, a list of credit accounts, credit inquiries, accounts in collections, and any additional public information about your financial obligations.
If you found a bad credit score, then diving into the details of your credit report can be extremely helpful. You can get a free copy of your credit report every year through AnnualCreditReport.com.
After looking at your credit score, you may decide to pursue credit repair.
Essentially, credit repair removes any inaccurate information from your credit report. Since most inaccurate information is negative, removing the false info can give your credit score a boost.
Of course, credit repair can only remove inaccurate information. So, any legitimate negative information on your credit report will have to stay. But credit repair is still a great option for anyone that spots mistakes.
You can take a DIY approach to credit repair. You’ll need to contact the credit bureau and report the mistake with as many details as possible. Depending on the situation, the credit bureau may or may not remove the information.
But you can also hire a professional credit repair service to work on removing inaccurate information for you.
Your payment history accounts for 35% of your FICO score. That makes it the most important factor in determining your credit score.
If you have any open credit accounts, making on-time payments is absolutely critical to improving your credit score. Although making on-time payments can be easier said than done, it offers a path to a better credit score.
One way to ensure you make on-time payments is to set up an automatic payment for the bills you are likely to forget about. With an automatic payment option, you never have to miss a due date again.
But if you are struggling to make on-time payments due to cash flow issues, then consider reevaluating your budget. Look for any areas you can cut back on to make ends meet.
If you know that you will miss a payment, reach out to your lender ahead of time. In some cases, they may be willing to work out a solution. For example, the lender could extend the due date or allow a temporary forbearance while you work out your cash flow problem.
Your credit utilization ratio accounts for 30% of your FICO score. Credit utilization measures the amount of debt you have in your revolving accounts as compared to the total available revolving credit.
For example, let’s say that you have a credit card with a $10,000 limit. If you have a balance of $5,000, then your credit utilization ratio would be 50%.
Most experts recommend keeping your credit utilization ratio below 30%. So, if your credit card balances are higher than that 30% mark, paying off your outstanding balance could significantly improve your credit score.
Of course, paying off credit card debt is easier said than done. But it can be more manageable with the right strategy in place. The two most effective debt repayment strategies are the snowball and avalanche methods.
With the snowball method, you’ll work to pay off your debt with the smallest balance first. Once that first debt is paid off, you’ll focus on larger and larger debts. On the other hand, you can implement the avalanche method by paying off the debt with the highest interest rate first. After paying off the highest interest rate debt, you’ll focus on the debt with the next highest interest rate.
In either case, the goal is to efficiently move through your debts by funneling any available funds towards the outstanding balances. It won’t be easy. But paying down your revolving credit accounts can have a big impact on your credit score.
A good credit score undeniably illuminates the path to a brighter financial future. As you improve your credit score, you’ll find better financing options. Plus, more ways to save on life’s expenses.
What are you waiting for? Start building your credit today.