Credit, whether good or bad, can impact every aspect of your life. It can make important financial transactions challenging or smooth. Your credit score isn’t just a random three-digit number. It is based on a credit history summary, directly impacting your work, where you live, and what you buy.
The world today is becoming increasingly dependent on credit for most financial decisions. However, good credit is needed for more than just getting a loan or credit card. It demonstrates your history of paying back debts to entities that grant you a loan.
While living on bad credit is doable, it is also expensive and challenging. Even if you don’t have credit, are new to credit, or feel like your credit is at a good range, understanding why good credit matters is crucial to your future financial stability. This article will discuss what constitutes good credit, why good credit matters, and how you can maintain good credit.
What Constitutes Good Credit
What is considered good credit can sometimes be subjective. This is because different lenders use different scoring methods to determine a good credit score. There are different credit scoring companies available, with the most popular being VantageScore and FICO. These credit-scoring companies use a scoring model to help financial institutions decide whether they should risk taking you on as a new borrower or increase your current credit limit.
However, different score versions are offered to lenders even within each score type when they want to assess your credit score. The lenders can also decide to use their version of a scoring system, which is why it can be difficult to pinpoint what is considered a good score.
What Forms a Good Fico Score
FICO has different types of credit scores for consumers. They make ‘base’ scores for lenders in different industries and industry-specific credit scores for auto lenders and credit card issuers. The FICO scoring scale has five categories ranging from ‘poor’ to ‘exceptional’.
Generally, FICO’s scoring system uses a scoring range of 300 points to 800 points. For FICO, good credit ranges between 670 points and 739 points. So, if you have a 643 credit score, it will be counted as “fair” on the FICO scoring scale. However, a credit score of 715 falls within the “good” credit score range.
What Forms a Good VantageScore
VantageScore is a joint venture formed by the three major credit reporting companies (Experian, Equifax, and TransUnion). VantageScore uses many of the same factors as FICO to determine your credit scores, like the credit mix and payment history. However, it uses its formula to decide how much these factors influence your score.
There have been various versions of scoring models for VantageScore. The previous models of VantageScore used a range between 501 and 990. The newer versions use a scoring range from 300 to 850 points, the same as FICO.
According to VantageScore, good credit falls from 661 points to 780 points. Surprisingly, a credit score of 669 counts as ‘fair’ on the FICO scoring scale but ‘good’ on the VantageScore scale. This further proves that what is considered a good credit score varies.
Reasons Why Good Credit Matters
Good credit is important. It is the precedent to many favorable financial transactions and decisions in your life. Below are reasons why good credit matters.
It Gives You Access To More Financial Opportunities
You’ll get access to more financial opportunities when you have good credit. Credit card companies and financial institutions love to know that they are working with customers with a positive history of paying back their debt on time.
If your credit score and history are healthy, you’re more likely to be approved for new lines of credit or loans, which is one of the biggest advantages of good credit. But if your credit history and score are bad, you’re less likely to get approved for any financial opportunity.
Access To Lower Interest Rates
In addition to getting approved for loans and new lines of credit, individuals with good credit are also offered lower interest rates. This is a good perk of having good credit as it makes it cheaper to get more credit.
An interest rate is the amount of money a credit card company or lender charges you for borrowing money. As not only do you have to pay back your loan, but you also have to pay up the interest on it. So, the better your credit, the lower the interest you’ll have to pay back. Paying less interest on your loan will help you save money over time, which is why you must cultivate the habit of building good credit.
Favorable Housing Opportunities
Whether you’re purchasing or renting a property, having good credit is crucial. Most landlords will use several factors to decide if you’ll make a suitable tenant. Some use your references from previous landlords and proof of adequate income. Others might decide to add your credit score to the mix. A good credit score shows the landlord that you are financially responsible and will most likely pay your rent on time.
Also, If you can get a large mortgage, you’ll be able to get your dream home. Home mortgage lenders are more likely to approve a loan and give you a high amount if your credit is good. This means with poor credit score and history, you’ll have less access to rentals that meet your expectations and preferences.
Access To Better Job Opportunities
One advantage of having good credit is that it opens your access to better job opportunities. Most companies want to ensure that they hire the best candidates for their vacant roles, so they run background checks that might include a credit check. With your permission, potential employers might decide to assess your credit reports as part of their background checks. They use your credit reports to determine if they should hire you.
A study showed that about 16% of companies conduct credit checks on potential employees during the hiring process. Your credit history shows potential employers that you’re reliable when managing your finances. Having bad/low credit will make prospective employers assume you are at risk for theft or fraud.
You’ll Get Lower Car Insurance Rates
Auto insurers look at your credit history when deciding how much car insurance you need to pay. They might not be able to deny you insurance coverage because of your credit history, but they can raise the interest rate if your credit history is bad.
Auto insurance companies consider several factors when calculating premiums, and your credit history is one of those factors. If you have a poor credit history, it indicates you were irresponsible when managing your finances. This shows auto insurers that you might be a high-risk customer, causing them to offer you a higher premium.
Since you need car insurance to drive, you might be stuck paying the high-cost premium for years to drive your car. If your credit is good, auto insurers will assume you’re responsible and offer you lower premiums.
It Grants You Greater Negotiating Power
There’s no telling what can happen to your finances, even with your good credit score. There might be times when you’ll face financial challenges that are out of your control and need to renegotiate the terms of your loan. With a solid repayment history, your lender might be willing to listen to your request for a renegotiated loan term. They might even consider reducing your interest rate so you can make fewer payments.
A good credit score can also come in handy when negotiating interest rates for a new loan or credit card. Your good credit score indicates your trustworthiness and capability to repay your debt.
Maintaining Good Credit
Building good credit is just the beginning; you must also maintain it. Maintaining good credit will help you continue enjoying the benefits that come with it. To maintain your good credit, you need to regularly practice the good credit habits that helped you build your credit score in the first place.
Ensure that your bills are paid on time. Do not exceed 30%of all your credit card accounts, and avoid closing old accounts just because you need to build new credit. You can also maintain your credit by performing regular credit report monitoring to check for potential fraud and mistakes.
Summary
There is no limit to what good credit can do for you in life. It can make general living smooth and worry-free. If you have no credit history or your credit score isn’t up tp par yet, you can take steps to establish or improve it. By managing your financial commitments responsibly, you’ll be able to build a good credit history and enjoy the benefits that come with it. We’ve highlighted some the points discussed above to help you understand the importance of having a good credit score.
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