You’ve probably seen the commercials by now. It’s hard to miss all the messaging out there about how to get a good credit score.
But that only tells half the story.
Those ads rarely tell you the importance of why you need to maintain a good credit score. Many people don’t fully understand how not monitoring their credit can have devastating consequences in their daily lives.
Before we delve into that further, let’s take a look at what exactly is a good credit score.
What is Considered a Good Credit Score?
While there is more than one credit scoring company, the one most commonly known is FICO®. This also means you can have more than one credit score since each scoring company provides its own.
The range of FICO scores is between 300 and 850.
If you’re in the 300-579 range, it will be extremely difficult for you to obtain credit as creditors will consider you to be a very high risk. In the 580-669 range, you will have a better chance of obtaining credit, but you may still encounter challenges, and your options will be limited.
From a score of 670 and above, it will be much easier to get approved for credit. The higher your score, the more options you will have to shop around for the best terms to suit your needs.
But this is just the tip of the iceberg for why having a good credit score impacts many aspects of your life.
Three Major Benefits of Having a Good Credit Score
While there are several reasons why you should strive for the best possible credit score, the three listed below are among the most impactful.
Save money on interest rates
When your credit score is in the poor (300-579) or fair range (580-669), creditors will charge you a higher interest rate to make up for the potential risk. For example, if you apply for a car loan with a 550 score, it is possible the lender could charge you interest at 20% or higher. If you apply with a score in the upper 600s or higher, the interest rate on your loan could easily be around 7% or possibly less.
Using the above example, let’s say your car loan is $35,000 for 60 months, and you don’t put any money down. If your interest rate is 20%, your loan payment will be around $927. Under the same terms, except the interest rate is 7% due to a higher credit score, your loan payment would be around $693.
That’s a difference of over $200 for every single month you make a payment on that loan. So, if you keep that loan until its full term of 60 months, that’s about $14,000 you would save with a better credit score.
I don’t know about you, but that’s a significant amount of money that could be used for something much more useful than as part of an interest payment to your lender.
Easily make larger purchases without hassle
In addition to saving money on interest with a higher credit score, you won’t have to jump through as many hoops to buy a car or home.
If you have a higher credit score, lenders may ask you for additional concessions before they approve your loan. They may want you to have a co-signor on the loan, which may mean asking a friend or family member to sign and be responsible for payments in case you default. You could also negatively impact their credit if you stop making payments.
You may also have to provide additional documentation to show that you can make the payments, such as bank statements or other sources of income.
Another concession would be to provide a down payment or a larger down payment than what is considered typical for the specific type of loan.
Now if you’re already struggling financially or have a limited source of income, these additional concessions could prevent you from qualifying for a loan. In some cases, having a mortgage may be cheaper than a rent payment, or having a car payment may be less expensive than alternative means of transportation. But if you can’t qualify for those loans, you’re stuck until you can improve your credit score.
Job potential
This scenario is one people often don’t think about until it’s too late.
When you apply for a job, they may run a background check on you, which could also include a credit check. This is especially true if you want to work in any aspect of the financial services industry. Their reasoning is that if you can’t manage your finances, how can you help their customers manage their own?
Currently, there are eleven states in the U.S. that won’t allow this, but there are exceptions. One of them being jobs that are related to the finance industry or that involve handling money. Keep in mind that employers can only look at your credit report and not your score. This can still be a problem if that credit report shows a bankruptcy, foreclosure, eviction, or a history of late payments.
Employers in other industries may view bad credit as simply a sign of being irresponsible. There is also the chance that your credit won’t be pulled at all. You may also be able to get by if you have other qualifications that help you stand out against other candidates.
The problem with this is that if you’re not employed, it will be difficult to pay your bills. And if you don’t pay your bills, it could negatively impact your chances of getting a job.
How to Improve Your Credit Score
So, if you have a low credit score, what can you do to raise it as quickly as possible?
While you most likely won’t be able to make a significant change to your credit score overnight, there are a few tactics you can try.
- Pay more than the minimum amount due on existing loans or credit cards
- Ask lenders for a credit limit increase
- Always make payments on time
- Keep track of your credit and report any discrepancies
- Take care of any accounts in collection status ASAP
- Add utility payments to your credit report to boost your credit history
You can see how having a good credit score benefits many aspects of your daily life. By monitoring your credit and staying on top of your score, you can help prevent mistakes as well as fraudulent activity that could lower your score. What are some of the tactics that helped you improve your credit score? Share your comments here.
