Your credit score is a measurement of your overall financial health and creditworthiness. Because your credit is a key piece of your financial identity, it’s crucial to build good credit early on. While a poor score can make your biggest financial purchases more expensive, a good credit score can give you a competitive edge during lending decisions.
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Forbes Advisor outlines nine benefits of good credit below.
1. Lower Interest Rates
One of the main benefits of good credit is lower interest rates on your loans. When you apply for a loan, like a mortgage or credit card, a lender or provider typically uses your credit score to determine your interest rate. The lowest rates are reserved for applicants with the highest scores; applicants with lower credit scores typically receive higher interest rates.
To put this into perspective, the average estimated interest rates for personal loans based on VantageScore risk tiers, according to Experian, are in the table below. Please note that lenders determine and set an individual’s interest rate on a particular loan. The rates provided are estimations.
| Vantage V4 credit score | Average interest rate |
|---|---|
|
Deep subprime (300-499)
|
15.30%
|
|
Subprime (500-600)
|
15.91%
|
|
Near prime (601-660)
|
15.56%
|
|
Prime (661-780)
|
10.93%
|
|
Super prime (781-850)
|
6.59%
|
2. Improved Likelihood of Qualifying for a Loan or Credit
If you’ve been denied for a loan or credit card, you know how painful it is. It can be a hardship if you were denied financing for something you need, like a mortgage or a car. And it can be devastating if you’re not approved for other loans, such as private student loans that help many people afford college. But with a better credit score comes better approval odds. Of course, your credit score isn’t the only factor that lenders consider, but it is an important one.
3. Approval for Certain Jobs
Some jobs, such as those that work with money or in security clearance positions, require a personal credit check. This is to make sure that you’re capable of handling finances, or that you’re not vulnerable to bribery because of financial problems. If you have a poor credit score, you may not qualify for certain positions.
4. Larger Credit Card and Loan Limits
If you have a good credit score, you’ll be eligible for larger loans, such as the jumbo loans needed to take out a mortgage in some high cost-of-living areas. You may also qualify for higher credit card limits, too.
For example, according to a recent Experian study, the average Baby Boomer had a credit score of 731 and a credit card limit of nearly $40,000. But for younger Millennials, the average person had a lower credit score of 668 and a smaller credit limit of around $20,000. It’s worth noting that Baby Boomers have had more time to build up good credit since the length of credit history contributes to your overall score.
5. Better Credit Card Rewards
In addition to a higher credit limit, a better credit score also unlocks a wider variety of credit cards. Many of the best rewards cards require excellent credit for approval. This includes travel rewards cards that you can use to fully fund your vacations, and cash-back rewards cards that earn a percentage back on your spending.
6. Easier Approval for Rental Properties
Even if you never plan on buying a house, you’ll still need a good credit score. Many people don’t realize it, but your credit score is a factor that landlords take into consideration with your rental application. If you have a good credit score, you’re more likely to be approved as a tenant since a history of on-time payment behavior is likely to be more attractive to a landlord than someone with multiple delinquencies. If not, then you may have to pay a higher deposit, agree to a short-term lease or even be denied for housing outright.
7. Lower Insurance Rates
Good credit also can save money on your insurance. Insurance companies use your credit score when deciding whether to accept you as a customer and how much to charge you, even though some officials think this practice is unfair. According to an insuranceQuotes study, people with fair credit (a FICO score of 580-669) paid 39% more on their auto insurance premiums. People with poor credit (A FICO score under 580) had it even worse, paying 103% more.
8. Avoid Security Deposits on Utilities
A good credit score can be important when it comes to getting your utilities turned on, too. If you have a good credit score, providers are likely to switch on your utilities with a minimal amount of hassle. But if you have poor credit, they may require a deposit from you, or even have someone legally agree to pay your bill if you don’t, similar to finding someone to co-sign on a loan.
9. Negotiating Power on Loan Terms
Not only can you get lower interest rates with a better credit score, but you can use it as a bargaining chip in the mortgage negotiation process as well. To do this, you’ll need to prequalify and check your rate with multiple lenders. Then, you can take your rate estimate around to different lenders to see if they can offer you better terms, either by lowering the interest rate even further or waiving fees for the loan.
Bottom Line
Building and maintaining a strong credit profile is crucial as your credit score plays a key role in most lending decisions. If you happen to have a low credit score, take time to improve your credit score to prepare for any future loan or rental applications.
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