Why Good Credit Matters
By Tracy Scott
Good credit matters. At least that’s what you’ve always heard. Whether you’re new to credit or think you already have a decent credit score, it’s important to understand why good credit matters. But, what do people mean when they say “good credit”?
When applied to an algorithmic formula, your prior use of credit (aka credit history report) is used to generate a credit score which is a representation of your potential to handle future credit responsibly. Generally, credit scores can range between 300 to 850 with 670 being a common cutoff to qualify as “good credit”.
Let’s distinguish between two terms commonly used when discussing credit.
1.) Credit History Report – A detailed history of your credit activity which includes credit repayment, types of credit accounts used, credit limit amounts, new credit applications, foreclosures, bankruptcies, and more. Equifax, TransUnion, and Experian receive monthly updates directly from creditors about your credit activity.
2.) Credit Score – A numerical representation of your credit report that indicates your overall likelihood of repaying your debt obligations on-time. The better your credit report history, the higher your credit score and the less perceived risk for the potential creditor.
Credit scoring companies (FICO® and VantageScore) use scoring models to help financial institutions decide if they should risk taking you on as a new borrower, increase your current credit limits or refinance existing debt obligations. Other companies may use your credit score to decide if you can access their products or services.
Even if you have no credit, recently received approval on a 2.50% interest auto loan, or don’t know what a credit denial looks like, understanding why you need to improve your credit score is critical to your future financial stability.
Good Credit Gives You Purchasing Power
A credit approval gives you the ability to borrow money to make purchases that may otherwise be difficult. Paying cash for a new home or car is an uncommon occurrence for most Americans, and good credit opens the doors for individuals and families to live the life they want today.
The higher your credit score, the better your choice of mortgage options, refinancing packages, and credit card offers. Poor credit either results in credit denials or approvals at high-interest rates or terms that may make a bad situation worse.
Good Credit Can Help Secure Employment
With your authorization, potential employers may access a limited portion of your credit history. Just as potential creditors want to assess risk before making a lending decision, employers hope to gain external assurance that the person they will hire is responsible – at least financially. Employer credit checks are more common in the financial services industry but are making their way into the general marketplace.
Good Credit Can Save You Money
Having good credit can save you money not only when you borrow but also when you sign up for services that have nothing to do with lending money. Consider the following:
Relocating to a new apartment or renting a home? You’ve likely figured the estimated costs of your main expenses like a rental truck, packing supplies, new furniture, etc. Add one more potential cost to your list if you have bad credit. The leasing office or landlord will most likely want to run your credit even though they are not extending credit in the traditional sense. When you don’t have good credit, they may require more in up-front security deposits or rent prepayments to minimize their risk of not being paid.
Bad credit can continue to cost you more than you’d budgeted for the move. Your new utility company will likely use your credit score to determine how much of a deposit is required for service.
Insurance Approvals and Rates
It’s common practice for car insurance companies to factor your credit history into policy decisions. This includes determining your approval and the amount of your annual premium. Again, good credit keeps your options open so you can shop around for the best insurance rates for you and your family.
Cell Phone Service
Cell phone carriers may check your credit before handing over a new phone or activating cellular service. Bad credit may force you into a prepaid cell phone plan which means that you pay in advance for services. If you don’t already have a phone you can activate, you must buy one straight out. Individuals with good credit can bypass prepaid plans and make installments on the purchase of a phone interest-free.
Creditors are happy to extend new credit to borrowers with a proven track record of paying bills on time and managing their overall credit responsibly. People with high credit scores receive more offers for low-interest credit cards, loan refinancing, and no-obligation “try before you buy” promotions. The more offers you have, the higher the likelihood of finding interest rates and terms that support your overall financial goals.
Simple Actions That Improve Your Credit
Surprisingly, you can improve your credit or build new credit by taking the same steps:
- Avoid rushing to apply for every credit offer that lands in your mailbox. Instead, only apply for credit that you need or with a particular credit building goal in mind. For example, if you need to strengthen your payment history, consider a Shared Secured Loan. A secured loan with Atlantic Financial Federal Credit Union does not require income verification or a credit check. Payments are reported to the major credit bureaus and can positively affect your credit score.
- Continue to pay your bills on time. This includes non-credit based bills. You’ll want to avoid the possibility of any account going into collections which will lower your credit score if reported to a credit bureau.
- Keep credit account balances below 30% of the available credit. When you keep credit utilization down, you can increase your score.
In its purest form, your credit score reflects how much credit you’ve taken on and how well you met the obligations for repayment. It’s difficult to go through life without needing to use credit at some point, so it’s best to build and maintain good credit. Your future depends on it.