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Good credit gives you financial control if you use it in the right way. Your credit score will determine whether you can get a car, home loan, or credit cards. It’s a little more than that too. A strong credit history shows lenders that you are trustworthy and able to pay off debts. Good credit broadens your opportunities in life.
This article is part of our series about financial literacy. You can find the links to the other articles at the bottom of the article.
Things That Good Credit Help You To Do
FICO is a type of credit scoring formula. It’s the most popular credit rating system among financial institutions. They use it to build your credit report. You can access this by requesting a free credit report.
FICO scores range from 300 to 850. The higher your FICO credit score, the better your chances of getting loans and credit cards.
It’s difficult to live in the modern world without credit. It can even impact your eligibility for jobs and housing rentals.
Let’s look at the ways a good credit report can transform your life
1. You Can Get a Car Loan without a Co-Signer
Most people can’t afford to buy a car out-of-pocket. A good credit score gives you the opportunity to get an auto loan without a co-signer. Your credit report affects how much you will receive and the interest rate you’ll get.
A good credit score can mean getting approved for more money and lower rates. Conversely, poor credit limits your prospects. You can still get a car loan, but most lenders will give you a higher interest rate. It’s a risk to lend money to someone if they don’t have a proven credit history.
The interest rate you get is important because it impacts the amount you end up paying back over time. Lower interest rates will save you money in the long run.
Auto loans help diversify your credit portfolio as they are an example of an installment loan. They also let you buy a car when you don’t have the cash upfront.
Having your own car can increase your opportunities in so many ways. You can drive to job interviews or the beach with friends on the weekend. Good credit paves that road for you.
2. Get a Credit Card
An excellent credit score gives you greater lending power. You can get a credit card with a credit card company to build revolving credit. This is another type of credit that helps expand your credit report.
There are two kinds of credit cards – secured and unsecured. Unsecured credit cards aren’t the safest way to build credit if the temptation to overspend is a struggle for you. The financial institution sets your credit limit then you make monthly payments on whatever you borrow.
Secured credit cards are the best for building or rebuilding credit if you can’t qualify for a normal credit card. It’s the best way to build credit without building debt. You set your own limit with a cash deposit of your choosing.
Then, you can use it the same way as you would an unsecured credit card. You only lose the deposit if you don’t pay back what you owe. Creditors then have peace of mind and do you.
Be sure to check the credit policies, check your available balance, and only use your credit card for purchases that you know you can pay back.
Credit cards are one of the fastest ways to build a good credit history. It’s also considered one of the most reliable credit building methods. You’ll get greater loans and increase your chances of buying things like a house or starting a business.
You may not be eligible for a credit card. In that case, ask someone to authorize you on their credit card account. It’s a great way to build credit, especially if you’re starting from scratch. (Also take a look at our list of Best Credit Building Apps here!)
3. Start a Business
Most business ventures require a sizable lump sum to get off the ground. You don’t always have this money in hand, so you will then need a business loan. A solid personal credit score is essential if you want to get a credit card or loan to start a business.
Credit bureaus then monitor your credit. The stronger your credit score, the better it is for your business.
When your company begins to expand, business credit will come in handy too. You can get lower interest rates and bigger loans to support your goals.
Business credit is different from your personal credit. Good personal credit is necessary while your business is young. Then, if you build business credit, you can eventually use your business’s credit to qualify for loans and financing.
You must check your credit utilization ratio and ensure it’s at 10% or less. As a general rule, the lower your credit utilization, the better an impact it will have on your credit score. You want your credit utilization to be 10% or lower to keep your credit score high. Even having it as high as 30% is okay.
Make sure your credit utilization ratio never reaches 50% or higher. A credit ratio this high will negatively impact your credit score, which could hurt your chances of qualifying for everything from new credit cards to home loans.
Building good credit can breathe life into your business goals and change the way you live.
4. Insurance and Other Services Sometimes Check Credit
These days your credit history can influence how much you pay for various insurance policies. A negative credit score can make it difficult to get good premiums.
Insurance creditors use credit-based insurance scores instead of traditional ones. They also consider other factors like the timeline of your good credit accounts.
Cell phone providers and landlords sometimes check your credit to make sure you can pay bills.
Good credit can also help you circumvent deposits or higher insurance premiums with good credit.
Remember that you can send your bill payment data to credit reporting agencies with tools like Experian BOOST™. It will help you expand your credit profile and build solid credit.
5. Good Credit Can Help Finance Big Purchases
You may want to get financing for furniture, solar panels, home improvements, four-wheelers, boats, and the list goes on. Having a solid credit score makes that possible.
Your credit history will help you anytime you want to buy something. It’s important to maintain good credit habits.
Home improvements often require large amounts of money but are worth the investment. Some home improvements, like installing solar panels, can give you a hefty tax break either in the year of purchase or when you sell your house.
Maybe you have a new hobby you want to pursue but don’t have the funds to start. Good credit opens doors to loans and credit cards that can help you reach your personal goals.
A strong credit score will improve your quality of life if you know how to use it properly.
6. Buy a House with Good Credit
Mortgage lenders want to know you can pay your monthly installments before authorizing a loan. They won’t consider you if you have poor credit or will give you higher rates.
Your credit score has a direct impact on your mortgage interest rate. It will have a profound impact on the overall amount you pay over the loan period.
You can use student loan repayments to build credit and show you’re already paying back an installment loan. It will give you a higher credit score.
A good credit score can also make you eligible for a VA loan if you’re a veteran or family of one. The Department of Veteran Affairs acts as a guarantor for authorized veterans. Private lenders offer VA loans for a $0-down mortgage.
A VA loan can make it easier to live the life you want and buy the house you and your family deserve.
Why is Credit Important When Buying a Home?
You won’t qualify for a home loan if your credit score isn’t at least 620. You will have unfavorable terms if your credit score isn’t at least 680.
Financial institutions will authorize loans, but you’ll have higher interest rates and down payment requirements as well as increased mortgage insurance premiums. And if your credit score is too low, you won’t even qualify for the loan.
How Bad Credit Hurts You
You still need excellent credit if you aren’t planning to open a business. Employers started checking credit reports before hiring to gauge the reliability of potential employees. Bad credit could lead to not getting your dream job. It’s another reason why credit is important.
Companies must ask for written permission to run a credit check. If you agree to a credit check, make sure you monitor your credit reports. They may turn you down if you have a lot of negative factors on your credit report.
High credit card debt can get you denied from certain loans, and it doesn’t help your interest rates. Having multiple evictions, collection accounts, and late payments may convince financial institutions that you are highly irresponsible.
Another reason why credit is important is that it impacts rental applications. Renting doesn’t typically require good credit. However, having multiple evictions on your credit report for missed payments may influence your eligibility.
You can repair bad credit, so there is hope for those who wish to buy a house. Ensure you are consistently building new credit, pay all your bills on time, and get your credit card utilization ratio under control.
You can turn around your credit report and open up new avenues for living your best life.
In short, having no credit or bad credit makes your life more expensive and difficult. You have more access to opportunities with good credit. You can build the life you want with healthy debts, good credit, and clever spending.
There are multiple reasons to build and maintain a solid credit score. You can:
- Buy a house
- Start a business
- Get hired by potential employers
- Open utility accounts to improve your quality of life
- Buy a car
- Get financed for big-ticket items
Bad credit is not permanent, but it can have a negative impact on your life and limit your opportunities. Build good credit to live the life you deserve. Always remember to maintain your credit history so you can get credit whenever you need it, even in emergencies.
To continue learning about financial literacy, see the following articles in the series:
- Personal Income Statement
- How To Create A Personal Balance Sheet
- Is It Better to Put a Large Down Payment on a House
- Dave Ramsey vs. Robert Kiyosaki: Who Should You Listen To?
- Good Debt vs Bad Debt
Here are other credit resources:
- Why did my credit score drop for no reason?
- Sample Letter to Remove Closed Accounts From Credit Report
- How to Write a Goodwill Deletion Letter to Remove Late Payments
- How to Increase Your Credit Score to 800
- The Best Way to Check Your Credit Score
- The FICO vs Vantage Credit Scores
- How to Build Credit Without a Credit Card
- Is 670 a Good Credit Score?
- How to build credit with bad credit
I am a Certified Lending and Credit Specialist and first gained experience fixing my own credit. My own credit scores went from the 500s to the 800s in one year. I studied economics at The George Washington University and now have my own business working with financial technology companies. I manage my own investments and live in Salt Lake County, Utah with my wife and two kids.