6 Reasons You Want a Good Credit Score

6 Reasons You Want a Good Credit Score

Lenders consider credit scores when deciding who they'll approve for credit—and in other decisions as well. They aren't only ones who use credit scores, either, and your score can affect your finances in several ways. Here, then, are some of the dollars-and-cents benefits to having a good credit score:

1. Significant Savings on Interest

Borrowers with the highest credit scores generally have access to the lowest interest rates available on mortgages and auto loans, and a lower rate can translate to big savings.

When you finance a big purchase, small differences in your financing rate can translate into thousands (or tens of thousands) of dollars in interest charges over the life of the loan.

For example, according to the Experian mortgage calculator, a 30-year mortgage on a $400,000 house with a 10% down payment and a fixed interest rate of 7.31% will cost a borrower a total of $889,381 in principal and interest over the life of the loan. If that same borrower can get an interest rate of 6.31%—1 percentage point lower—they will pay $803,034 over the life of the loan, a savings of $86,347.

2. Better Terms and Access to Loan Products

Lenders commonly use credit score "cut-offs" as preliminary eligibility screens when deciding what type of loan they will offer you—if they'll offer any loan at all. Each lender sets its own lending criteria, but, for example, a hypothetical mortgage issuer might have a policy of refusing loan applicants with FICO Scores below 620, offering only adjustable-rate mortgages to applicants with scores between 620 and 699, and fixed-rate loans only to applicants with scores above 700.

A lender might further segment its fixed-rate loan offers, offering its very best interest rates only to borrowers with FICO Scores of, say, 760 or better. Specific cut-offs will vary by lender (which is one reason you should always do rate shopping when looking for a loan), but in general, you gain access to more favorable loan terms and options as your credit scores increase.

3. Access to the Best Credit Card Rewards

Like mortgage and auto lenders, credit card issuers use credit score cut-offs in decisions about which cards you qualify for. To a far greater extent than other lenders, card issuers also use credit scores to promote their products. When you receive a prescreened credit card offer, it's likely that your credit scores indicate a good chance of qualifying for the card.

Offers for the most exclusive rewards cards—those with the most generous mileage, accommodation, points or cash back rewards are typically only available to borrowers with high credit scores. What's more, many are only marketed directly to candidates who qualify for them.

Note that a good score may not guarantee approval for these offers—card issuers, like other lenders, typically consider your income and other debts as well as scores when making credit offers—but approval odds are in your favor if you're targeted with a card offer.

4. Insurance Discounts

Car insurance companies in many states use specialized credit-based insurance scores to help decide whom they'll cover and what premium they'll charge a given policyholder. Insurance scores are not the same as those lenders use for credit applications, but are similarly derived from information in your credit reports.

These scores are just one of many factors that go into determining your insurance rates—your driving history and ZIP code are major factors as well—but good credit can help you save money on car insurance. You can't be turned down for insurance if you have a low credit score, but having a high score can help you qualify lower premiums.

5. More Housing Options

Many landlords and property management companies check potential tenants' credit scores to gauge their level of financial responsibility. A low score could prevent your application from being approved or cause you to be charged a higher security deposit on a rental house or apartment.

6. Security Deposit Waivers on Utilities

Utilities including internet providers, cable companies and satellite dish companies may review your credit reports and scores in order to assess their risk in taking you on as a customer. If you lack a strong credit history, they may require a significant security deposit before starting service or lending you equipment such as routers, dishes or cable boxes.

What Is a Good Credit Score?

While there are countless credit scoring models on the market, 90% of top lenders use FICO Scores, which assign scores in a range of 300 to 850. FICO Scores are categorized into the following credit scoring bands:

• Exceptional: 800 and above
• Very good: 740 to 799
• Good: 670 to 739
• Fair: 580 to 669
• Poor: 579 and below

Most lenders consider a FICO^® Score of 700 or above to be a good credit score.

How to Improve Your Credit Score

To improve your credit, you'll need to demonstrate that you can manage your credit responsibly. You can do this by making every payment on time, keeping card balances low and taking other steps to improve your credit health.

Don't Miss Payments

Your payment history is the most important factor in determining your credit scores. A long history of on-time payments can help you achieve excellent credit scores, and just one payment made 30 days late can do significant harm to your scores.

Many credit card issuers and other lenders enable automatic payments for the minimum amount due each month, and using these tools can help you avoid missing payments (as long as you're careful not to overdraw your bank account).

Pay Down Revolving Account Balances

High balances on credit cards and other revolving credit accounts elevate your credit utilization rate and can hurt your credit scores. Individuals with the highest credit scores tend to keep their credit utilization ratio in the low single digits.

Catch Up on Past-Due Accounts

If you're behind on any bills, bringing them current can help your credit scores. A late payment can remain on your credit report for up to seven years, but just because you've already missed a payment doesn't mean you should give up. Bringing your past-due accounts current stops additional score-damaging late payments from appearing in your credit history and prevents costly late fees.

Limit New Credit Applications

You can't build a credit history without a record of borrowing and repaying some combination of loans, credit cards, in-store financing and/or other forms of personal credit. Nevertheless, each credit application you submit can lead to a hard inquiry that lowers your credit scores. The impact of these inquiries is typically small and short-lived, but too many within a short time can add up and significantly lower your credit scores. Opening multiple new accounts can also decrease the average age of all your accounts, which can also hurt your scores.

One important exception is when you're rate shopping for certain types of installment loans, such as an auto loan or mortgage. Credit scoring models recognize that rate shopping isn't risky behavior and may ignore some inquiries if they occur within the span of a couple of weeks.

Build a Diverse Credit Portfolio

As you slowly and steadily begin building a credit portfolio, keep in mind that credit scoring systems such as the FICO^® Score and VantageScore^® tend to react positively to evidence that you can handle multiple loans of different types—a scoring factor known as credit mix. A combination of revolving accounts such as credit cards or personal lines of credit and installment accounts—such as an auto loan, student loan or mortgage—will tend to promote score improvement.

The Bottom Line

As you work toward achieving the best credit score you can get, it may be helpful to review your FICO^® Score for free through Experian to chart your progress. If you stick to good credit habits and keep in mind that it's normal for scores to fluctuate some on a month-to-month basis, you can take satisfaction in long-term score improvement—and the many benefits it confers.