Today’s post is from our regular Wednesday contributor, Erin.
When’s the last time you stopped to think about your credit score? Or the last time you thought about how your spending habits might be affecting your score?
Probably not often. Credit scores seem to get overlooked a lot, especially where young adults are concerned.
After all, many of us are trying to scrape by with what we have. We might not necessarily be looking to make a major purchase that would require excellent credit.
Unfortunately, that line of thinking isn’t going to help you in the future. While you may not need amazing credit now, it doesn’t hurt to begin building credit at an early age.
If you don’t think your credit score is something to be concerned about right now, read on to learn 4 reasons why your credit score is important, and find out how it can affect your financial situation.
Reason #1: A Score Looks Better Than Nothing
If you don’t build credit early on, or you don’t make use of credit at all, you could be left with a thin file.
At my old job, I used to run credit checks on applicants for business loans, and I was shocked at the number of times “limited or no credit history” came up.
That’s not really attractive to lenders. They are letting you borrow a decent chunk of money. It’s reasonable to make sure you’re trustworthy and capable of paying it back. Without a credit history, you can’t exactly prove you’re responsible with money.
I saw this happen firsthand as investors came back and told us the applicant didn’t meet their minimum required score. It wasn’t fun being the bearer of bad news, and applicants were surprised to learn they had no credit.
Please, do yourself a favor – before we go on – check your score, especially if you’ve never done it before. Annualcreditreport.com gives you 3 free copies from each bureau. It doesn’t take long to fill out the form.
Reason #2: A Better Score Gives You Better Rates
Credit scores are critical components to getting better interest rates on loans. The difference between an excellent score and fair score could mean saving thousands. Don’t think so? Just take a look at this simple chart from myFICO that outlines the numbers.
While some lenders are taking other factors into consideration, such as your employment history, education, and debt-to-income ratio, others are still sticking to credit scores as one of the main deciding factors.
Now, you might not be in the market for a loan. Or maybe you own a home, have your mortgage and think you’re set. Having a good credit score never hurts.
You don’t know what could happen. If something major in your house decides to break, if you have an unexpected medical emergency that falls outside of your insurance coverage, or if your car randomly bites the dust (or gets totaled), you might find yourself needing more money than you have in your emergency fund.
Hopefully none of the above happens, but you may face a situation that requires you to turn to a lender for help. Getting a personal loan, taking out a HELOC or an equity loan on your house, or getting a car loan might be some options you’d consider. These all require credit checks.
Wouldn’t you rather have excellent credit and pay less because you’re eligible for the best interest rates?
Reason #3: You Appear More Responsible and Trustworthy
I said this at the beginning, but it bears repeating. Having a good credit score means you’re responsible and can make timely payments. Of course lenders love that! Why wouldn’t they?
While it makes getting approved for a loan and obtaining a better rate easier, it can also help you in other ways.
Companies have been performing credit checks along with background checks on candidates more and more lately, especially if you’re going to be dealing with money or sensitive information within the company. They want to make sure your financial situation is solid.
Insurance companies are also likely to check your credit score. You might be able to get better rates on premiums!
Additionally, your credit will most likely be checked when you fill out a rental application. Some private landlords do this as well (and for good reason).
Rent is a significant chunk of your income. If you can’t handle making the minimum payments on your credit card, how are you going to afford rent?
Reason #4: A Better Credit Score Means More Credit Available
Besides applying for a loan, you might be interested in applying for a credit card. (Secured credit cards are actually a decent way to build your credit, too.)
Having a better credit score means being able to apply for better cards! This is especially true when it comes to rewards cards with great signup bonuses. Since they typically require more upfront spending, creditors want to ensure you can handle (potentially) larger payments.
Additionally, once you’ve had a credit card for a while and have proven you’re capable of making timely payments, you can ask your creditor to increase your credit limit.
Don’t do this if you’ll be tempted to spend it all. We want to advocate for responsible credit card usage!
If you know how to use your card wisely, increasing your limit gives you wiggle room when it comes to your credit utilization. If you have a $300 balance on a card with a $500 limit, you only have $200 free. If you have a $2,000 limit, you have $1,700 free. That looks much better.
Be wary though – sometimes creditors will automatically increase your limit without you asking, so check beforehand.
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Overall, having a good credit score gives you more options, and options are always a good thing to have when it comes to financial matters.
If you’re looking to learn more about what affects your credit score, check out DC’s post here.
When did you start caring about your credit score? What do you wish you had known about managing your credit in your early 20s?
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If there is one thing I’ve always had going for me financially, it’s my credit score. It helped me secure a small loan for my car last year so it made having debt not feel too bad. If I didn’t have a great credit score, being a freelancer without steady pay, it might have been difficult to get such a good interest rate.
I generally think a FICO score is not all that important. But, there are going to be a handful of times in your life when it’s critical (as you’ve noted, when filling out job or rent applications, or when trying to buy a home).
Overall, I’d say anything above 760 is fairly equal: I haven’t seen any benefit of trying to get your score up in the 800+ range.
I enjoy having a high credit score because it allows you to travel hack. I don’t think we’ll need any sort of loans for a while, but I do intend to get as many points and miles as possible.
This might seem funny, but I didn’t have any credit established until last year. It’s one of the downsides of growing up in so many different countries. I’ve never spent long enough time in any country to justify opening a credit card. So my credit is on the lower side right now even though I’ve always paid on time and in full. All because my credit lines are less than a year old :(
There were also cultural influences that led me to believe that I shouldn’t use credit cards. I kind of explained it a little bit in my guest post for Michelle on Making Sense of Cents haha. But I really enjoyed this post Erin! It made me look back on all those dumb financial advice I used to hold on to.
I start caring about my credit score when I was 16 (thanks Mom and Dad!) hah. It’s been really beneficial when it came time to buy a car and a house since I had awesome credit, I got extremely low interest rates.
Beachbudget So true! Having a good credit score is definitely a must when you’re a freelancer, especially if you have a rough year. We’ve been thinking of getting a newer car and I’m a little worried about getting approved, though my credit score has always been fine.
DonebyForty I do think it becomes less important as you go through life and become more established. After you get through the major purchases and you have a nice cushion, you’ll have less of a need for it. I just think it’s important to start off on the right foot, rather than have to rebuild. =) Agreed that it plateaus for the most part – no need to go crazy trying to have a “perfect” score!
Eyesonthedollar Yes, the better travel rewards cards do seem to have stricter requirements as far as credit goes. It’s always nice when you don’t have to worry about getting approved!
Anum Thanks! I’ve read it’s difficult to build up credit in that situation. It stinks that moving around and living in different countries is almost like a penalty. I’m sure with continued responsible usage it will increase sooner rather than later!
Christina@EmbracingSimple Yep, interest rates are so important! I was absolutely floored when I found out my fiance had a 12% interest rate when he bought his used car. The loan was only for $3,000, but he had to finance through the (ahem, shady) dealer because he had no credit. Yikes.
Have you heard that they’re going to start looking at other things besides debt to account for your score? I’m SO excited about this!!
Financegirl Yes! There are a number of loan companies out there already that are looking past credit scores and focusing on salary, education history, employment history, DTI, etc. Apparently they’ve figured out a pretty smart algorithm to determine creditworthiness based on other factors, so it makes sense to translate it to credit scores as well. It’ll make the process much easier.
Another issue: renting. I’ve been an apartment manager. People who didn’t have credit scores had to put down more money because the company couldn’t tell whether they were a risk or not.
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