The Importance of a Good Credit Score

Having a good credit score is a real achievement, a badge of honor that signifies hard work and proves that you can responsibly manage money. But it gives you more than just bragging rights. A good credit score also delivers real financial benefits because it gives you access to easier credit approval, better loan terms, more loan options, and could save you tens of thousands of dollars in interest over your lifetime.

Is having a good credit score worth the effort? Absolutely.

Here’s why the three-digit number known as your credit score holds so much power over your financial future.

What is a credit score and why is it important?

Your credit score is a summary of all the information found in your credit report, an indicator of how responsible you are in terms of managing your money. Your credit score lets lenders and others know if you are creditworthy, based on your past behavior, and whether you are likely to pay your debts on time. It can even be used in some states to determine whether you’ll be a good employee, a good tenant, and more.

Your credit score is determined by five key criteria. The two most important are how much credit you use, called your credit utilization, and your payment history, which tracks whether you pay your bills on time.

Good, better, best… What is a good credit score?

Most of the top U.S. lenders use FICO^® scores, which are categorized by levels:

A higher score makes you more appealing to lenders, landlords, and others. Although it varies, most want to see a credit score of 700 or higher.

It takes time to build good credit, but the effort will pay off. The challenge? Developing a good credit score can be a bit of a financial Catch-22: you build credit by getting credit, but you need credit in order to build credit. But it can be done.

Because it takes time to build good credit, and because the number and types of credit you have expand as you age (known as your ‘mix’ of credit), your credit score may rise as you get older, although some young people have earned excellent credit scores.

Why good credit matters: Benefits of a good credit score

A good credit score paves the way for a lot of other good benefits, both financial and other, that really add up.

1. Lower interest rates: When you qualify for a lower interest rate, it saves you money every month over the life of the loan, which can add up quickly over time.  These savings become even greater when you qualify for a lower interest rate on something longer term like a mortgage with a higher principal. 
2. Better chance of qualifying for loans and easier credit approval: Having a good credit score makes you a desirable customer and gives you more options. Lenders are more likely to approve your loan or mortgage application when you have a good credit score.
3. Helps you qualify for bigger loans, loans with more flexible payment terms, or credit cards with a higher credit limit: For example, a lender may eliminate the prepayment penalty for someone with a good credit score, or you may qualify for a bigger mortgage. A good credit score shows that you are a good credit risk, which means that lenders could be willing to let you borrow more money.
4. Better credit card rewards: Credit cards may offer rewards programs and other perks that can be unlocked when you have a higher credit score. These can include sign-up bonuses, travel insurance coverage, cash-back benefits, extended warranties on purchases, and more.
5. Save money on insurance: Some states allow insurance companies to use credit-based insurance scores to help determine premium rates¹. While this number is not calculated in the same exact way as your regular FICO credit score, it does consider your payment history and other financial factors. Higher scores can result in lower insurance premiums.
6. Eliminates or reduces security deposit requirements from everyday items like cell phone plans and utility accounts: While the typical savings varies widely, a good credit score saves you from having your money tied up unnecessarily.
7. Helps improve your chances of a successful rental application: Some states allow landlords to use your credit score when considering your lease application, because they assume that a good credit score indicates that you are more likely to pay your rent on time. Some landlords may even reduce the required security deposit or allow you to pay your rent using a credit card if you have good credit.
8. May even give you an edge when you apply for a job: Because some companies equate good credit with overall responsibility, your credit score may be considered in some states by companies making hiring decisions. A good credit score may lead a potential employer to believe that you will be a reliable employee.

Keys to building a good credit score

A good credit score takes time and effort, but it can be done, even if you’re young. Here are a few tips if you’re an established borrow.

• Be diligent; always pay your bills on time and never miss a payment.
• Start building your credit history as soon as you can. The longer you have credit accounts, the better your score.
• Use your credit, but don’t use it all. Experts say you should not use more than 30% of your available credit.
• Do your best to pay your full credit card balance every month.
• Try to have access to a variety of credit types (mortgage, credit cards, auto loans, etc.) to demonstrate that you can manage them all responsibly.
• Once you’ve built a good credit score, do your best to maintain it. Here are10 Ways to Protect Your Credit Score.