Why Is Credit Important?

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 pa