By Ismat Mangla
There are a few rock-solid pieces of financial advice everyone should strive to follow: Save money for an emergency fund. Pay down your debt. Don’t spend more than can you afford.
But there’s another bit of financial wisdom that many experts tout: Keep your credit scores as high as possible.
Credit scores are an important part of your financial health. You want good credit scores because they can unlock many savings and benefits, including access to loans and credit cards with the most favorable terms. Read on to find out why having a high credit score is beneficial.
6 Reasons You Want a Good Credit Score
Americans often rely on credit—the ability to buy things with borrowed money that’s paid back over time—to finance major purchases, such as buying a car or home, and to make life easier with conveniences like credit cards, which can help you manage your daily spending. To determine whether you qualify for such loans, lenders may look at a number of factors, including your income, debt-to-income ratio, and even employment history.
But they also almost always rely on an automated evaluation process that includes considering your credit scores and credit history to determine how likely you are to pay back your debts on time. A credit score is a three-digit number that’s calculated by applying a mathematical algorithm to the information in one of your three credit reports (from Experian, TransUnion or Equifax), which are updated regularly with information from your credit accounts. Typically, the higher your credit scores, the more likely you are to qualify for loans with the most favorable terms, including lower interest rates, higher dollar amounts, and potentially lower fees.
Having a good credit score comes with many advantages, including:
1. Significant Savings on Interest Rates on Big-Ticket Loans
When you take a large loan to finance a big purchase like a home or car, even a small difference in the interest rate can translate into thousands of dollars over the lifetime of a loan. Borrowers with the highest credit scores are generally able to secure the lowest interest rates available at a given time for a mortgage or auto loan. And that can mean big bucks.
For example, a 30-year fixed mortgage of $250,000 at 5.5% will cost a borrower a total of $511,010 over the lifetime of the loan. If that same borrower can get a 4.5% interest rate—just one percentage point lower—she will pay $456,017 over the life of the loan, a difference of $54,993.
2. Better Terms and Availability on Loan Products
Borrowers with strong credit scores will have access to the most loan and credit card products available since lenders will want to lend to them. They will be able to shop around and compare rates more effectively. They’ll also find the best terms, including higher dollar limits, which can make it easier to finance big purchases.
3. Access to the Best Credit Cards
High credit scores will afford you access to the most rewarding credit cards on the market, including those that offer the lowest interest rates and the best rewards, such as cash back offers, travel points, and other incentives. You are also more likely to qualify for an introductory 0% APR purchase and balance transfer offers, which can translate to significant savings over time.
4. Insurance Discounts
You can’t be turned down for insurance if you have a low credit score, but having a high score can help you qualify for lower insurance premiums on car insurance.
5. More Housing Options
Some landlords of rental management companies consider a potential tenant’s credit scores to determine whether they are financially trustworthy. The higher your credit scores, the more likely you are to be approved for a home or apartment rental. You could also save money on your security deposit if you have higher credit scores.
6. Security Deposit Waivers on Utilities
Some utility companies may consider your credit reports and scores to determine how likely you are to pay your bills on time. If you don’t have a strong credit history, you may have to pay a security deposit to initiate utility services.
What Is a Good Credit Score?
While there are countless credit scoring models on the market, one of the most commonly used is the FICO® Score☉ model, which places scores in a range between 300 and 850. FICO® breaks up these scores into the following credit scoring bands:
- Exceptional: 800 and above
- Very Good: 740 to 799
- Good: 670 to 739
- Poor: 579 and below
Generally, a score of 700 or above in the FICO® model is considered a good credit score in most lenders’ eyes.