August 9, 2021
Good credit scores are important. They help you negotiate better interest rates and terms on loans, credit cards, and essential bills now. But they also save you a considerable amount of money that you can put toward your future, like retirement, savings, and paying down debt.
Why Your Credit Score Matters
Better scores mean better deals. While your credit score is not the end all be all, it does play a significant role in the financial opportunities available to you. Your credit score dictates what loans you are approved for — as well as the interest rates on those loans and other credit accounts — where your insurance premiums are set, which apartments you’re able to rent, and whether or not utility companies will waive your security deposit.
Bad credit scores can end up costing you hundreds or even thousands of dollars on interest rates, or hinder your ability to get a loan altogether. According to FICO, lenders will deem your credit score a good one starting around 670, and as a borrower, you may begin to reap the benefits of a high credit score. For reference, FICO scores range from 300–850.
FICO Score Range
Less than 580: Poor
740–799: Very Good
More than 800: Exceptional
A recent LendingTree study found that people with fair credit scores pay on average more than $56,000 in interest over the lifetime of their loans (credit cards, personal, auto, student, mortgage) compared to those with very good credit scores. For a mortgage alone, someone with a very good credit score would save $41,000 on interest; for someone with a credit card balance of about $3,600, they would save $2,995 on interest with a very good score.
How Your Credit Score Works
You actually have many different scores from many different scoring services, but the most popular credit scoring models are FICO Score (used by about 90% of financial institutions and lenders) and VantageScore.
Each month, lenders and credit card issuers will report your most recent activity on credit accounts, including balances and payments, to the three credit bureaus — Equifax, Experian, and TransUnion. Open accounts may include credit cards, lines of credit, student loans, personal loans, car loans, or a mortgage. Once the bureaus receive that information, they add it to your credit reports, which are then put into an algorithm by credit scoring agencies to calculate your credit scores.
Because new numbers are reported on a monthly basis, your score will fluctuate just as frequently to reflect any updates in your credit history.
From your credit score, lenders, credit card issuers, and other companies can make a hard inquiry on your credit report to assess your level of risk and competence with borrowed money. They use that to determine whether they want to approve you for a loan, offer you a job, lower your interest rate, or waive a security deposit.
How to Maintain a Good Credit Score
If you have a high credit score and make a mistake, like missing a credit card payment, you will see a larger drop in your credit score than someone with a low score. A slip up by someone with a higher score is more of a red flag to lenders because it indicates that you might be going through some sort of financial hardship, increasing how risky you are to them as a borrower.
This means that if you have a good credit score, it’s important that you work hard to maintain it.
- Pay your bills on time, and pay as much as possible, even if it’s only the minimum amount
- Use your credit lightly but regularly to show that you are a reliable borrower
- Try not to close accounts to boost your credit history length, utilization, and credit mix — put the card to the side if you don’t want to feel tempted to use it
5 Reasons Your Credit Score Is Important
Better interest rates and terms
With a good credit score, you automatically have access to top-tier APRs, credit limits, and low-to-no-cost fees on credit cards, lines of credit, loans, and other types of credit. Lenders will compete hard for your business, which you can use to your advantage when negotiating better terms.
You can ask your lender or insurer to re-run your credit check so that you can get better rates and terms if you improve your credit score after your initial policy agreement. The company can continue using your original, lower score if you don’t flag it, which could end up costing you a lot of money in the long run.
Higher likelihood of loan approval
Interest aside, your credit score helps determine whether you secure a loan at all. This goes for mortgage lenders and lenders of auto loans, personal loans, student loans, and other types of loans. With a low score, you can be considered too big of a risk to a lender, and they may disqualify you as a loan candidate altogether. With a higher score, you can be pre-approved for a loan without having to go through the process of shopping around.
Access to better credit cards with lower fees
Similar to lenders, credit card companies may pre-approve you for a credit card with competitive rates and terms to entice you to become a customer. You should be careful not to jump at every opportunity, as this is an easy way to rack up credit card debt; however, having credit card offers at your fingertips can work in your favor if you’re looking to build your credit or spread your credit utilization across multiple cards.
With better terms come fewer fees — or no fees at all. Credit card companies know that fees are an instant turn-off, so customers with good credit scores are offered lower balance transfer fees, no annual fees, and other perks.
Lower insurance premiums
Lenders and credit card companies aren’t the only ones who pay attention to your credit score — insurers have a vested interest as well. When signing up for insurance, the company will take a close look at your credit score to determine how reliable you are with payments and managing your accounts. Potential customers reap the benefits, as they’re rewarded with lower monthly insurance payments to reflect their good behavior with credit.
Stronger candidate for rentals, jobs, and more
Future employers, leasing agents, utility companies, and phone providers — they also want to know that you have a positive credit history before bringing you on as an employee or customer. Not only will you have more options for where you can rent, work, and become a customer, different companies can reward you with lower or waived security deposits, better monthly payments, and new products or services at no additional cost.