Chances are, you know it’s important to have a good credit score. But do you know exactly what defines a good score?
FICO designates a very good credit score as somewhere between 740 to 799. A bad score is anything less than 580. But keep in mind, a score between 580 and 699 is only considered “fair.” What’s your credit score? If you answered, “I’m not sure,” you should take a look ASAP.
Many people are under the impression that checking your score can lower it. That’s not exactly true. Only “hard pulls” impact your credit score, and those typically happen when you apply for a new line of credit or loan. Checking your own score is considered a “soft pull” and shouldn’t have an impact on your score.
Your credit score determines a wide range of things, so make sure you keep an eye on it. A bad credit score can keep you from achieving financial freedom. A good score, on the other hand, will benefit you in more ways than you probably imagine. Keep reading to learn more.
1. Credit Card Approval
Your credit score determines whether you’re approved for a credit card, as well as what type of card you’ll qualify for. The higher your score, the better chance you have of getting approved for a card with helpful perks. These include welcome bonuses, travel points, cashback offers, and a low annual percentage rate (APR). Some credit cards offer an introductory 0% APR and even bonus points after you spend a certain amount.
Borrowers with low credit scores are less likely to get approved for cards with the best offers. In fact, if your score is low, you might not qualify for a credit card at all. But all hope is not lost.
According to Chime, a credit card builder can help those with low credit build up their score for free. You might even consider becoming an authorized user on someone else’s account to help build your history and boost your credit score.
2. Better Housing Options
Believe it or not, your credit score matters even if you’re not thinking about applying for a loan. That’s because some landlords will run a credit check before approving a potential tenant’s rental agreement. A bad credit score won’t just make it difficult to purchase a home, but renting a place might also be a challenge.
Even if you are approved to rent with your low score, the landlord might require you to pay a higher security deposit. That’s because they’ll see you as a greater risk. Setting up your utilities may also be difficult if you have a low score. For similar reasons, utility companies might charge a hefty security deposit.
3. Higher Credit Limits
How much you’re able to borrow is largely based on your score. Consequently, having a high credit score might also qualify you for a higher credit limit.
The reality is that banks feel more confident loaning money to individuals with higher credit scores. To lenders, having a good score most likely means you’re good with money. It suggests you have experience borrowing and paying back what you borrowed in a timely manner.
This doesn’t necessarily mean your credit limit will be nothing if you have a lower score. But it will probably be a more limited amount than if your score was through the roof.
4. Low Interest Rates
An interest rate is the amount of money a lender charges a borrower for borrowing money. When you take out a loan to buy a house or car, your lender will determine your interest rate based on your credit score.
For example, let’s say you have a good credit score and borrow $200. Your interest rate might be a max of 5%. That means if you pay off the loan in a year’s time, you’ll end up paying your lender $205. If you have a low credit score, your interest rate might be double — or even triple — that amount.
Obviously, $200 is a pretty low amount, considering loans for cars and homes may be for tens or hundreds of thousands of dollars (or more). But the principle — if not the principal — is the same. Lenders are less confident loaning money to individuals with low credit scores, so they’ll typically charge higher interest rates to offset their potential risk.
5. Enhanced Employment Prospects
Some companies will look at your credit report before offering you a job. While your report doesn’t explicitly show your score, it shows the contributing factors.
For example, your report will indicate whether you have a history of missing payments, opening numerous new lines of credit, etc. With that information, your employer might infer where your credit score falls. And they can certainly intuit how prudently you handle money. This could influence their decision to hire you, especially if the role entails financial responsibilities.
We’re not saying a credit report will necessarily determine whether or not you land a job. But it might cause your future employer to form a certain opinion about you. Do you want to make a good first impression? Make sure you have a good credit score.
6. Lower-Cost Car Insurance
How much you pay in car insurance is also determined by your credit score. That’s because, according to research, those with lower credit scores are more likely to get into accidents.
While your credit score isn’t the only factor, it’s an important one. Studies have shown insurers that taking the score into account enables them to more accurately predict losses. According to Nationwide Insurance, 92% of all insurers look at credit scores when determining auto premiums.
While there are several benefits of having a good credit score, the overall takeaway is that it will make your life easier. A good credit score means lower interest rates, a better chance of landing your dream home, and maybe even getting a job. While achieving a good score isn’t easy, it can be done — and it’s worth your while to do it.