What Are the Benefits of Good Credit?
Equifax, one of the top three credit reporting bureaus, considers credit scores between 670-739 to be good credit scores. FICO is one of the most commonly used credit scoring companies. FICO uses information from credit bureaus like Equifax to calculate a three-digit credit score that represents your credit. The scores are calculated based on five categories:
- Payment History (your record of paying your bills on time) – 35% of your credit score.
- Amount Owed (how much of your credit are you using) – 30% of your credit score.
- Length of Credit History (how long have you had credit) – 15% of your credit score.
- Credit Mix (how many different types of credit you have) – 10% of your credit score.
- New Credit (how often you are applying for credit) – 10% of your credit score.
Good credit history of on-time payments, not using too much credit, not trying to get a lot of credit, and having different credit types give businesses an idea of how much they can trust you to pay your bills on time. In a nutshell, if a company feels you will pay them back, you will typically pay less than someone a business may not think will pay them back.
Here are some of the benefits of having good credit:
Lower Annual Percentage Rate (APR)
This is the interest you pay to your creditor for using their credit. The better your credit score, the less interest you pay.
No Security Deposit
Businesses often lower or even eliminate security deposits for people with good credit. Companies use deposits as “insurance,” so if you don’t pay your bill, the business will keep your deposit to pay the missed bill. This is why companies ask for a security deposit from people with no or low credit scores.
Buying a Car
Your credit affects your ability to own a vehicle in a few ways:
- Places where you can buy a car. Some dealers will not finance someone with a poor credit score (typically under 580 for some businesses)
- The amount of your monthly payment. Your car payment is a combination of the car’s principal cost and your loan interest rate mixed in with other fees: the higher your interest rate, the higher your car payment.
- Your ability to get car insurance. Many insurance companies use your credit history to decide your premiums or even if they will give you car insurance.
Buying a Home or Rent an Apartment
Your credit score significantly affects your ability to own a home due to the following:
- Home loans: Your credit score determines which types of loans you can get. The more loans you are eligible for, the better. Your credit score determines how much interest you pay, affecting your overall monthly payment.
- Apartments: Most landlords will review your credit report. Some apartment buildings may require a minimum credit score to approve your application. A high score may also mean a reduction in a security deposit for your apartment. It may also reduce or even eliminate a security deposit for utilities.
Homeowner’s and Renter’s Insurance
Getting a job
Most employers will check your credit. Some employers, like a bank, may require you to have a good credit history. Other places, particularly those that require security clearances, may review your credit to make sure you have a good record.
Good credit history affects many areas of your life. Take the time to review your credit. If your credit score isn’t where you want it to be, consider reading “How Do You Improve Your Credit Score?“
This series on building credit is brought to you in partnership with United for Financial Health powered by Experian. Log in to your SaverLife account to earn points for reading about credit and taking quizzes to test your knowledge.