A Quick Review of Credit
Let’s start by getting back to the basics.
What is credit? In short, it’s the ability to borrow money with the promise you’ll pay it back by a certain date.
Your credit history is a record of your overall credit repayment; on-time payments, late payments, and no payments.
And your credit score gives lenders an idea of your creditworthiness.
One of the most widely used credit score models is FICO® (created by the Fair Isaac Corporation). FICO® scores range from 300 to 850. A score of under 580 is considered a Poor rating. It shows potential lenders this borrower could be a risk. Conversely, a FICO® score of 670 to 739 is rated as Good, and demonstrates to potential creditors this borrower could be reliable.
Ultimately, bad credit could be considered risky, while good credit may be rewarded in the following ways:
1. Higher Credit Limit Approval
With better credit, you could get approved for a higher credit limit. Good credit demonstrates to lenders you’re reliable. As a result, it may encourage them to lend you more money.
With a higher credit limit you might have the financial freedom to make larger purchases more efficiently, instead of trying to open another credit card to cover a big purchase. If you do open an additional card, it’ll lower your total accounts’ age average. Thus, potentially lowering your credit score.
However, you might also be able to lower your credit utilization, which plays a big role in your credit score.
2. Better Insurance Rates
Tired of paying pricey premiums for auto and home insurance? Better credit may help lower your rates. According to a recent auto insurance study, poor credit raised rates over 61% compared to consumers who had average credit. Conversely, those with very good credit saved more than 17% per year.
Another analysis found that drivers with poor credit may pay over $2,500 more per year than drivers with very good credit.
The facts are clear: better credit can help save significant money at home and on the road.
3. Better Access to Utility Services
Poor credit can even complicate something as essential as receiving utility services. According to the Federal Trade Commission, utility companies will look at your credit history when you apply for services. The better your credit, the easier it’ll be to attain those services. Unfortunately, if you’re a new utility customer or an existing customer with a poor payment history, they may charge a deposit or even ask for a letter of guarantee (i.e. a friend or family member who accepts responsibility for any unpaid bills).
However, with good credit and payment history you could get utility services with no deposit or guarantor required.
4. Better Housing Options
If you’ve ever applied for an apartment in a major metropolitan area, you know how difficult approval can be with less-than-perfect credit. With good credit you may gain a competitive edge when you apply to rent an apartment. For frame of reference, the average U.S. renter’s credit score was 638 in 2020.
Similarly, the Consumer Financial Protection Bureau states good credit could be influential in your ability to get a reasonable interest rate on your mortgage loan.
Raise Your Credit Score to Move Forward
Let’s review the benefits of improving your credit:
- You may get better rates on auto and home insurance
- You might receive access to higher credit limits (while lowering credit utilization)
- You might not have to pay deposits on utilities (or find for a guarantor)
- You could have greater optionality in finding the apartment or home of your dreams
What’s not to like? It’s clear good credit plays an integral role in the full picture of your financial life.