5 Benefits of Having Good Credit
After you turn 18, all of the sudden a landside of credit card advertisements coming flowing in. Insurance companies and banks start advertising to you, and you start looking for affordable housing. All of these things involve your credit score. You’ve heard the commercials about checking your credit score online, and if there’s ever a hack, the news lights up about personal credit scores. Something as simple as a number can become important because it determines a lot of financial choices in your life.
Credit scores are determined by five factors: your payment history, current debt, length of credit history, types of credit used, and applying for new credit. These five pieces are combined together to give you a FICO score that ranges from 300-850. 300 is considered poor credit, and tells lenders that you are a high risk, while anything above 700 is considered good credit with a low risk. Now that you know what credit is–how does it apply to your life?
- Lower interest rates: Those who have good credit standing will generally receive a lower interest rate on anything that they borrow. Not everyone can pay large sums of money all at once to buy the necessary things in life. That’s where loans and payment installments come into play. When you borrow or pay down incrementally, you have interest on top of the total amount. Good credit scores tell the lender that you’re good for the money and that they have little to worry about. That’s why they’re happy to help you by giving you a low interest rate. If you have poor credit, then lenders get worried that you’ll default and they’ll never see their money back. They will give poor credit scores a higher interest rate for taking a chance on them.
- Higher borrowing power: If you have good credit, then banks are happy to lend you more money. They don’t worry as much about you paying them back, so they are willing to give you more money in loans.
- Higher limits on credit cards: Similarly, credit card companies will let you spend more on the card, trusting that you will pay them back promptly. By having a good credit score, you show the companies that you have healthy spending habits, and manage your money well. From that, they see you as a low risk, and let you spend more per month.
- Approved for renting and owning: You may have found your dream apartment, but you have to have your credit in order to rent it. Price for the apartment isn’t the only thing that you have to factor in. Higher end apartments cost more, meaning that you need to have a higher credit score to rent with them.
- Better insurance rates: Insurance companies want to see how high of a risk you are to them financially. The FICO algorithm shows them if you are responsible or not. If you show that you make good financial decisions, then they are more likely to give you more coverage at a lower rate. Everything from car insurance to renters insurance uses this 3 digit number to determine what rate you’ll pay.
There are many benefits of having good credit, but if you have a lower credit score, it’s not the end of the world. You can build up your credit score by paying off bills on time, by eliminating existing debt, and by being selective in opening up new credit accounts. It may be tempting to get that extra 15% off at your favorite store by opening a credit card with them, but that’s one more credit line open that pulls your score down. Check your score occasionally through the year, and you’ll see it rise to good standing in no time.