Why Is Credit Important? Benefits Of Having Good Credit
Victoria Araj6-Minute Read
PUBLISHED: August 24, 2023
Whether you want to buy a home or open a credit card, lenders look at your credit to assess your ability to take on debt. Strong credit shows creditors you’re dependable, which can broaden your financial opportunities. For example, a high credit score can help you secure favorable loan terms or your dream apartment.
Let’s examine the importance of having good credit and explore a few tips on how to maintain a solid credit score.
The Importance Of Credit
Credit enables borrowers to make purchases they don’t have the cash to pay for at the time of purchase. Loans, lines of credit and credit cards are a few commonly used types of credit. Many Americans rely on credit to buy expensive items like homes and cars. In fact, over 100 million Americans have at least one auto loan.
Your credit may also play a role in whether you get a job or are approved to rent a home, for example. The Department of Housing and Urban Development says bad credit limits these opportunities.
Why Credit History Is Important
While credit itself gives you buying power, your credit history is a main factor in what you can borrow. Your credit history gives lenders information about how you repay your debts. Good credit can give you access to more credit options and increase your chances of approval.
Why Credit Score Matters
Your credit score, which can range from 300 to 850, provides a glimpse into the overall health of your credit. FICO® and VantageScore® are two of the most widely used credit scoring models. An 850 is a perfect score, and the closer you are to that number, the more you reap the benefits of good credit.
Conversely, people with a low credit score may face more challenges. Some cell phone carriers and electric companies won’t even service you if you have bad credit. If you do secure a loan with poor credit, it likely will have a higher interest rate than you’d get with good credit. Strong credit can help you live comfortably and become approved for credit with ideal loan terms.
Benefits Of A Good Credit Score: When Your Credit Matters
Your credit can significantly impact many areas of your life. A good credit score can give you access to better opportunities and help you save money. Benefits of a good credit score include:
- A lower interest rate
- Better loan and credit card terms
- A higher likelihood of job, rental, loan and credit card applications being accepted
- Increased borrowing or credit limits
- Access to more financial opportunities
Situations in which maintaining good credit is advantageous include those we’ll describe next.
Taking Out A Loan
Whether you’re buying a home or car or taking out a personal loan, a good credit score will put you in the best position. In fact, you typically need a minimum credit score of 610 – 640 for personal loan approval.
Aside from better chances of approval, you also often qualify for better terms. You may be eligible for a low interest rate, which can save you a significant amount over the term of your loan. You’re also more likely to be approved for a higher borrowing limit.
Refinancing An Existing Loan
If your credit score is better than when you originally took out a loan, you may want to consider a refinance. Refinancing with stronger credit can get you a lower interest rate and better terms.
Opening A Credit Card
Similar to when you take out a loan, a higher credit score can gain you access to the best credit card offers. You may qualify for cards with more generous rewards programs or a low interest rate. On the other hand, consumers with a lower credit score may have access to fewer credit card options.
Leasing A House Or Apartment
Landlords commonly perform credit checks when you apply to rent a home or apartment. When screening tenants, landlords look for someone they can trust to pay rent on time. You’re more likely to have your rental application approved if your credit is good.
Getting A Job
In states that allow it, some employers check your credit when you apply for a job. Employers may even treat your credit information as a factor in hiring decisions. Good credit history shows your responsibility and dependability to employers.
On the other hand, poor credit can make employers doubt your reliability.
Insurance companies assess your level of risk when deciding whether to insure you. In some states, this includes checking your credit report. A good credit score can make insurance companies see you as a lower risk. They may be more likely to take you on as a policyholder and offer you lower premiums if you have desirable credit.
How To Maintain Good Credit
Your credit score can be the key to achieving many life goals, so it’s important to keep it in the best shape possible. If your credit is already good, continue demonstrating financial responsibility. If you have a low credit score, you can take steps to boost your score.
Ways you can maintain or improve your credit score include:
- Making regular, on-time payments on bills and other debts: Avoid making late payments and, especially, missing payments. Unpaid debt can result in delinquencies on your report and severely lower your score.
- Checking your credit regularly and disputing any errors: Catching errors on your credit report can prevent unnecessary damage to your credit score.
- Keeping credit utilization ratio at or under 30% of your total credit limit: Using more than 30% your total limit can signal financial irresponsibility to creditors. Consider asking for a credit limit increase, if possible, to keep your credit utilization
- Diversifying your credit profile: If you only have a credit card, it may be worth applying for a personal line of credit or a personal loan. Be sure to space new credit applications out by 3 – 6 months. Waiting between applications gives your credit score time to recover from hard inquiries.
- Keeping old credit accounts open: Closing credit cards can harm your score for various reasons. You may close an account with a positive history or one that’s your oldest account. Doing this could increase your credit utilization ratio if you later put more purchases on other accounts.
FAQs: Why Is Credit Important?
Still have questions about credit and why credit matters? Check out our answers to some frequently asked questions.
What is a good credit score?
FICO® and VantageScore® use different scales and consider different scores “good.” Both scales view a credit score at or above 670 as good.
Generally, it’s possible to buy a home or open a credit card with a credit score in the 600s. However, you may have access to more financial opportunities with a credit score of 700 or higher.
What makes up my credit score?
The main credit bureaus – Equifax®, Experian™ and TransUnion® – calculate credit scores differently from each other. However, the factors that go into calculating scores are generally the same. According to FICO®, these factors include:
- Payment history (35%)
- Amounts owed (30%)
- Length of credit history (15%)
- Credit mix (10%)
- New credit (10%)
How do I manage my credit score?
Making smart financial decisions is crucial for managing your credit score. You should monitor your credit score by checking your score at least monthly. Through the end of 2023, you also can get a free credit report every week at AnnualCreditReport.com from each of the three main credit bureaus. Checking your credit report can help you catch errors that could lower your score.
Is having no credit bad?
No credit is better than bad credit, but neither is ideal. Mortgage lenders, credit card companies and other lenders can’t assess your credit risk if you lack any credit. This may cause you to struggle to get approved for loans and credit cards with favorable terms.
Credit is an important aspect of many financial milestones. Using a loan, line of credit or credit card can grant you the capacity to make purchases you can’t pay for outright. A good credit score can also help you secure financing and make you a strong candidate for a job or rental property. Maintaining good credit is essential for getting a low interest rate and ideal terms.
Whether you’re opening a credit card or applying for a personal loan, be sure to have strong credit first. If you’re ready to take out a personal loan, submit an application online with Rocket LoansSM today.
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